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Weekly Market Review

23 July 2019

Clint McGarvin, CFA® | Portfolio Manager/Research Analyst

Week Ending July 19, 2019

U.S.

U.S. equities struggled last week as earnings season kicked off Monday. The S&P 500® did not react positively to the solid growth in earnings as large caps declined a little more than 1.2% while small caps were down nearly 1.5%. The consumer has supported the economy this year as the trade war cut into business optimism as well as business spending. This trend continued in June as retail sales increased a strong 0.4%, up 3.4% year-over-year. The June increase includes a decline in gas prices.  By stripping out gas sales, retail sales jumped 0.7% month-over-month. Internet retailers were once again the strength of the sector, rising 1.7% in the month and increasing 13.4% year-over-year.[i] Consumer spending was weak in the first quarter but picked up in the second quarter suggesting the health of the consumer is strong and may keep the economy growing in the second half of the year. Conversely, the Fed’s industrial production was flat in June compared to May but was down 1.2% in the second quarter following a 1.9% decline in the first. According to the Fed’s data, the manufacturing sector is in a recession if we use the definition of two consecutive quarters of decline.[ii] There is a bright spot for the manufacturing sector as the Philadelphia Fed manufacturing index jumped to 21.8 last month from 0.3 in June as 56.1% of the firms in the index reported an increase in demand.[iii]

Other economic releases last week:

Housing starts declined again in June falling to 1.253 million from 1.265 million in May.

Consumer sentiment increased to 98.4 in June from 98.2 in May.

Capacity utilization declined slightly to 77.9% from 78.1% in May.

Approximately 10% of S&P 500® firms have reported earnings with year-over-year growth of 8% with banks up 6%, a positive start to earnings season.

International

International developed equities trended in the same direction as the U.S., falling about 0.1% on the week. On the other hand, emerging markets were higher on the week by about 0.7%. Emerging markets benefitted from data out of China showing exports were down less than expected falling 1.3% compared to the expected decline of 2.0%, suggesting that the negative effects of the trade war may be waning. The manufacturing sector of the European economy has been in a recession, but manufacturing activity, at least temporarily, improved in June as output was up 0.9%, easily beating expectations.[iv]

Fixed Income

Fixed income markets exhibited negative correlations with equities last week as long-term Treasuries jumped nearly 1% and high-quality bonds were up almost 40 basis points. The 3-month to 10-year segment of the Treasury yield curve moved in the right direction as the 3-month yield declined 8 basis points while the 10-year was down 7 basis points, so the negative spread ended the week at 1 basis point.

Summary

In the U.S. the economic data showed contrary trends. The consumer continues to spend at the retail level, but manufacturing has fallen into an apparent recession. We see the same trend internationally as European manufacturing is in a recession based on economic indicators. However, June potentially saw a reversal in the manufacturing recession as European industrial production increased and the Philly manufacturing index jumped last month. Earnings in the U.S. have come in positive as well, which bodes well for the markets in the second half of the year as earnings growth is expected to accelerate over the last two quarters.

Upcoming Reports

Previous Expected
Existing-Home Sales 5.33 million 5.34 million
Markit manufacturing PMI 50.6
Markit services PMI 51.5
New Home Sales 640,000 626,000
Durable goods orders 0.8% -1.3%
Q2 GDP 2.1% 3.1% first quarter

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[i] U.S. Census (2019), Advance Monthly Sales for Retail and Food Services, June 2019. Retrieved from https://www.census.gov/retail/marts/www/marts_current.pdf
[ii] Federal Reserve Statistical Release (2019), Industrial Production and Capacity Utilization. Retrieved from https://www.federalreserve.gov/releases/g17/Current/g17.pdf
[iii] Philadelphia Fed (2019), Manufacturing Business Outlook Survey, July 2019. Retrieved from https://www.philadelphiafed.org/-/media/research-and-data/regional-economy/business-outlook-survey/2019/bos0719.pdf?la=en
[iv] CNBC (2019), European Stocks Close Flat Following Euro Zone, China Data; Thomas Cook Plunges 60%. Retrieved from https://www.cnbc.com/2019/07/12/european-stocks-investors-imf-euro-zone-fears.html072219CST082219

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