What I’m Watchin This Week – 27 June 2016

The Markets (as of market close June 24, 2016)

The Brexit referendum vote sent a tidal wave of negative returns throughout the world’s stock markets, including the indexes listed here. The large-cap Dow lost over 270 points on the week and, along with the S&P 500, dropped over 1.50% from the prior week. In fact, with this week’s performance, gains that had been made over the close of 2015 have been given back as each of the indexes listed here are below their 2015 closing values.

In addition to stock markets around the world being battered, European currencies took a hit, particularly the British pound, which dropped by more than 11.0% compared to the dollar. Yields on long-term government bonds also fell. The price of gold followed the prior week’s gains with another week of increasing value.

Crude oil (WTI) closed at $47.57 a barrel last week, down $0.69 from the previous week. The price of gold (COMEX) rose to $1,319.10 by late Friday afternoon, up from the prior week’s price of $1,301.60. The national average retail regular gasoline price decreased for the first time in six weeks to $2.353 per gallon on June 20, $0.046 under the prior week’s price and $0.459 below a year ago.

Market/Index 2015 Close Prior Week As of 6/24 Weekly Change YTD Change
DJIA 17425.03 17675.16 17400.75 -1.55% -0.14%
Nasdaq 5007.41 4800.34 4707.98 -1.92% -5.98%
S&P 500 2043.94 2071.22 2037.41 -1.63% -0.32%
Russell 2000 1135.89 1144.70 1127.54 -1.50% -0.74%
Global Dow 2336.45 2300.22 2250.69 -2.15% -3.67%
Fed. Funds rate target 0.25%-0.50% 0.25%-0.50% 0.25%-0.50% 0 bps 0 bps
10-year Treasuries 2.26% 1.61% 1.55% -6 bps -71 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • British Prime Minister David Cameron vowed to resign following Britain’s surprise referendum vote last week to exit the European Union. Stock markets around the world plummeted, and the British pound fell by as much as 11% following news of the vote. Roughly 17.4 million United Kingdom voters chose to exit the European Union by 51.8% of the vote. With the vote, the UK has two years to negotiate its withdrawal from the EU. To formally exit the EU, the UK must invoke Article 50 of the Lisbon Treaty. Since Article 50’s adoption in 2009, no member country has exited the EU, so how the process will work is relatively unknown as this is the first time Article 50 will be invoked. Until then, EU treaties and laws will continue to apply to the UK.
  • Basically, the EU is an economic and political partnership of 28 countries operating as a single market, which allows free movement of goods, services, money, and people within the EU as if it were a single country. With the EU’s second-largest economy voting to exit the EU, many issues remain to be resolved, including determining the status of UK citizens working in the EU and vice versa, whether travel restrictions will apply to UK citizens seeking to move about the EU, trade ramifications between the UK and the EU, and the status of Scotland and Northern Ireland, both of which voted to remain in the EU. Finally, it is important to note that the referendum vote is not legally binding. Parliament must pass laws to formally withdraw from the EU. In short, much is still to be determined, meaning Brexit will be in the news for quite some time to come.
  • It was a busy week for FOMC Chair Janet Yellen, who appeared before the Senate Banking Committee and the House Financial Services Committee. Submitting identical remarks before both committees, Yellen reiterated the need to maintain a cautious monetary approach regarding the economy. Citing the Brexit vote, China’s economic situation, stalled labor growth, and inflation that remains below the Fed’s target 2.0% rate, Yellen said the expectation is that the economy will improve over time. However, the pace of improvement is uncertain, so the timing of interest rate adjustments is not on a preset or predictable course.
  • Falling durable goods orders in May provided some justification for the Fed’s cautious stance on projected economic growth. New orders for durable goods (expected to last at least three years) fell 2.2% to $230.7 billion following two consecutive months of gains. According to the Census Bureau, excluding transportation, new orders decreased 0.3%. Excluding defense, new orders decreased 0.9%. Durable goods shipments (-0.2%), inventories (-0.3%), and new orders for nondefense capital goods (-0.8%) each fell short of their April totals. But the biggest impact on May’s orders was felt in new orders for defense capital goods, which dropped 28.0%. Businesses are not upping investment in durable goods, presumably because there is no need to ramp up sales to meet consumer demand. But it is worth noting that overall durable goods orders are up 1.7% for the first five months of 2016 compared to the same period last year.
  • Existing home sales picked up the pace in May, according to the National Association of Realtors®. Total existing home sales grew 1.8% to a seasonally adjusted annual rate of 5.53 million, up from a downwardly revised 5.43 million in April. Sales are 4.5% ahead of the May 2015 rate, and are at their highest annual pace since February 2007. The median existing-home price for all housing types in May was $239,700, up 4.7% from May 2015. Total housing inventory jumped 1.4% to 2.15 million existing homes available for sale, which represents a 4.7-month supply–the same as April.
  • On the other hand, new home sales edged downward in May, according to the latest report from the Census Bureau. Sales of new single family homes fell 6.0% in May to an adjusted annual rate of 551,000–35,000 below April’s revised annual rate of 586,000. May’s figure is still 8.7% above May 2015. While the pace of new home sales clearly slowed in May, sales are still moving at a favorable pace, particularly compared to April, which marked the fastest sales pace since February 2008. The median sales price of new houses sold in May 2016 was $290,400; the average sales price was $358,900. The seasonally adjusted estimate of new houses for sale at the end of May was 244,000. This represents a supply of 5.3 months at the current sales rate.
  • Consumers are a little less confident in the economy moving forward, according to June’s Surveys of Consumers from the University of Michigan. The Index of Consumer Sentiment fell to 93.5 in June from 94.7 in May and 96.1 in June of 2015. The Current Economic Conditions Index, and indication of spending, was positive, as June’s reading of 110.8 was greater than May’s 109.9. Generally, consumer sentiment has remained strong over the last 18 months, particularly bolstered by positive assessments of personal finances.
  • In the week ended June 18, the advance figure for seasonally adjusted initial unemployment insurance claims was 259,000, a decrease of 18,000 from the previous week’s unrevised level of 277,000. The advance seasonally adjusted insured unemployment rate remained at 1.6%. The advance number for seasonally adjusted insured unemployment during the week ended June 11 was 2,142,000, a decrease of 20,000 from the previous week’s revised level.

Eye on the Week Ahead

The last week of the month and quarter is highlighted by the final estimate of the first-quarter GDP and the latest figures on personal income and outlays. Particular attention will be paid to personal consumption expenditures (PCE)–an important measure of inflation according to the Federal Open Market Committee. It will be interesting to see how Wall Street responds following the upheaval caused by the Brexit vote.

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What I’m Watching This Week – 20 June 2016

The Markets (as of market close June 17, 2016)

The Fed maintained interest rates at their current level following last week’s meeting, primarily influenced by May’s mundane employment report. That, coupled with a fall in global stocks, pushed U.S. stocks down as money seemed to move to gold and long-term bonds. Each of the indexes listed here lost value compared to the prior week. The Dow dropped 190 points and 1.06%. Since June 8, the S&P 500 is down 3.7% after falling 1.19% last week. The tech-heavy Nasdaq lost almost 2.0%, while the Russell 2000 dropped over 1.50%. Gold soared in price, crude oil remains below $50 a barrel after exceeding that mark a few weeks ago, and the yield on long-term Treasuries is down 65 basis points since the beginning of the year.

Crude oil (WTI) closed at $48.26 a barrel last week, down $0.68 from the previous week. The price of gold (COMEX) rose to $1,301.60 by late Friday afternoon, up from the prior week’s price of $1,276.30. The national average retail regular gasoline price increased for the fifth week in a row to $2.399 per gallon on June 13, 2016, $0.018 above the prior week’s price but $0.436 below a year ago.

Market/Index 2015 Close Prior Week As of 6/17 Weekly Change YTD Change
DJIA 17425.03 17865.34 17675.16 -1.06% 1.44%
Nasdaq 5007.41 4894.55 4800.34 -1.92% -4.14%
S&P 500 2043.94 2096.07 2071.22 -1.19% 1.33%
Russell 2000 1135.89 1163.93 1144.70 -1.65% 0.78%
Global Dow 2336.45 2333.86 2300.22 -1.44% -1.55%
Fed. Funds rate target 0.25%-0.50% 0.25%-0.50% 0.25%-0.50% 0 bps 0 bps
10-year Treasuries 2.26% 1.64% 1.61% -3 bps -65 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • The Federal Open Market Committee held interest rates at their current range of 0.25%-0.50% following its meeting last week. The Committee noted that, while growth in economic activity has picked up and household spending has strengthened, the pace of improvement in the labor market slowed, job gains diminished, and inflation continues to run below the Committee’s 2.0% longer-run objective. Essentially reiterating a common theme of late, Chair Janet Yellen stated, “We continue to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate. We expect the rate to remain, for some time, below levels that are anticipated to prevail in the longer run because headwinds weighing on the economy mean that the interest rate needed to keep the economy operating near its potential is low by historical standards.” It would appear that June’s employment report will have a significant bearing on whether the Committee increases interest rates in July.
  • According to the latest report from the Census Bureau, consumers are spending more as retail and food services sales increased in May over April. Total retail sales and services came in at $455.6 billion in May, 0.5% over April and 2.5% ahead of May 2015. Retail trade sales were up 0.4% from April, and are up 2.0% from last year. Nonstore (online) retail sales were up 12.2% from May 2015, while health and personal care stores increased 8.3% from last year.
  • Increasing energy costs are pushing the prices manufacturers receive for goods and services higher. The Producer Price Index rose 0.4% in May following a 0.2% gain in April. In May, over 60% of the index gain can be traced to prices for goods, which climbed 0.7%. Prices for services moved up 0.2%. Prices less foods, energy, and trade services edged down 0.1% in May after rising 0.3% in April. For the 12 months ended in May, the price index less foods, energy, and trade services increased 0.8%.
  • Despite gains in consumer spending, the prices consumers are paying haven’t moved much. The Consumer Price Index for May showed prices increased a scant 0.2% over April (0.4% increase), while the core prices, excluding food and energy, also inched up 0.2%. Food prices fell 0.2% while energy prices increased 1.2%, reflective of a rise of 2.3% in gasoline prices. Over the last 12 months, the all items index rose 1.0%, while the index for all items less food and energy rose 2.2%.
  • The Federal Reserve’s Index of Industrial Production, which includes factories, mines, and utilities, fell 0.4% in May after increasing 0.6% in April. Manufacturing output moved down 0.4%, led by a large step-down in the production of motor vehicles and parts (-4.2%). Factory output, aside from motor vehicles and parts, edged down 0.1%. The index for utilities fell 1.0% as a drop in the output of electric utilities was partly offset by a gain in natural gas utilities. After eight straight monthly declines, the production at mines moved up 0.2%.
  • Driven by rising oil prices and a weakening dollar, both import and export prices increased in May over April. Prices for U.S. imports increased 1.4% following advances of 0.7% in April and 0.4% in March. U.S. export prices advanced 1.1% in May after rising 0.5% the previous month.
  • Home-builder sentiment improved in June as the National Association of Home Builders Housing Market Index rose to 60 after four straight months at 58. Builders expressed renewed confidence in the market for newly constructed single-family homes in June. According to the NAHB report, builders are seeing more traffic and committed buyers. Breaking down index components, the future sales index gained 5 points to 70, future sales increased 3 points, and present sales jumped 1 point to 64.
  • Low mortgage rates and steady job growth have spurred activity in the housing market. However, a lack of inventory and rising prices have kept some would-be homebuyers away. Evidence of this can be seen in the housing starts (the beginning of construction) report for May, which saw privately owned housing starts fall 0.3% to an annual rate of 1,164,000. Single-family housing starts were at an annual rate of 764,000, which is 0.3% above the revised April figure of 762,000. Building permits for private homes increased 0.7% in May, but are off 10.1% compared to May 2015. Builders are apparently trying to keep up with demand as privately owned housing completions in May were 5.1% above the revised April estimate of 940,000.
  • In the week ended June 11, the advance figure for seasonally adjusted initial unemployment insurance claims was 277,000, an increase of 13,000 from the previous week’s unrevised level. The advance seasonally adjusted insured unemployment rate increased 0.1 percentage point to 1.6% for the week ended June 4. The advance number for seasonally adjusted insured unemployment during the week ended June 4 was 2,157,000, an increase of 45,000 from the previous week’s revised level.

Eye on the Week Ahead

The housing market is back in focus this week as May’s figures on existing home sales and new home sales are released. In April, new home sales hit their highest rate since January 2008, while sales of existing homes increased by almost 2% from March. May’s figures are expected to continue to show progress, yet they may not approach the robust growth made in April. Internationally, June 23 marks the date Britons vote on the referendum to determine whether their country remains in the European Union or “Brexits.”

What I’m Watching This Week – 13 June 2016

The Markets (as of market close June 10, 2016)

The major market indexes listed here were relatively flat for the week. Despite gains earlier in the week, losses Thursday and Friday wiped out most of the positive returns. By midweek, the S&P 500 reached its highest level since last July only to give back most of the gains, closing the week slightly behind its prior week’s closing value. Technologies underperformed with Nasdaq falling almost 1%. Oil reached $51 per barrel by the middle of the week, but fell back to below that benchmark by week’s end.

Crude oil (WTI) closed at $48.88 a barrel last week, down $0.02 from the previous week. The price of gold (COMEX) rose to $1,276.30 by late Friday afternoon, up from the prior week’s price of $1,246.50. The national average retail regular gasoline price increased for the fourth week in a row to $2.381 per gallon on June 6, 2016, $0.042 above the prior week’s price but $0.399 below a year ago.

Market/Index 2015 Close Prior Week As of 6/10 Weekly Change YTD Change
DJIA 17425.03 17807.06 17865.34 0.33% 2.53%
Nasdaq 5007.41 4942.52 4894.55 -0.97% -2.25%
S&P 500 2043.94 2099.13 2096.07 -0.15% 2.55%
Russell 2000 1135.89 1164.13 1163.93 -0.02% 2.47%
Global Dow 2336.45 2349.87 2333.86 -0.68% -0.11%
Fed. Funds rate target 0.25%-0.50% 0.25%-0.50% 0.25%-0.50% 0 bps 0 bps
10-year Treasuries 2.26% 1.71% 1.64% -7 bps -62 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • Speaking to the World Affairs Council of Philadelphia, FOMC Chair Janet Yellen emphasized that the economy is moving in the right direction. According to Yellen, “I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones. As a result, I expect the economic expansion to continue, with the labor market improving further and GDP growing moderately. . . . I expect to see inflation moving up to 2% over the next couple of years.” As to the prospect of increasing interest rates, Yellen noted that “further gradual increases in the federal funds rate will probably be appropriate to best promote the FOMC’s goals of maximum employment and price stability,” although she did not go so far as to hint that a rate increase was imminent following the June FOMC meeting.
  • Productivity remains weak as the second estimate for the first quarter showed nonfarm business sector labor productivity decreased at a 0.6% annual rate during the first quarter of 2016, the U.S. Bureau of Labor Statistics reported. Output increased only 0.9%, while hours worked increased 1.5%. From the first quarter of 2015 to the first quarter of 2016, productivity increased 0.7%. Unit labor costs in the nonfarm business sector increased 4.5% in the first quarter of 2016, reflecting a 3.9% increase in hourly compensation and a 0.6% decline in productivity. Unit labor costs have increased 3.0% over the last four quarters.
  • The U.S. Bureau of Labor Statistics reported the number of job openings was little changed at 5.8 million on the last business day of April. The job openings rate was 3.9%. Job openings increased in a number of industries, with the largest changes occurring in wholesale trade, transportation, warehousing, and utilities. Job openings decreased in professional and business services. The number of hires edged down to 5.1 million in April. The hires rate was 3.5%. There were 5.0 million total separations in April, little changed from March. The total separations rate in April was 3.5%. Total separations, or turnover, includes quits, layoffs and discharges, and other separations.
  • The federal deficit expanded by $52.5 billion in May amid rising spending and falling corporate profits. For the first seven months of the fiscal year, the deficit sits at $407.1 billion compared to $366.8 billion for the same period last year.
  • Initial survey results for June show consumers are still cautiously optimistic about the economy. The latest report from the University of Michigan’s Surveys of Consumers shows the Index of Consumer Sentiment fell slightly to 94.3 from 94.7 in May. But the Current Economic Conditions Index increased from 109.9 to 111.7. The Index of Consumer Expectations dropped to 83.2 from 84.9 in May. According to the report, consumers rated their current financial situation at the best levels since 2007, but they did not think the economy is as strong as it was last year nor do they anticipate the economy will enjoy the same financial health in the year ahead as they anticipated a year ago.
  • In the week ended June 4, the advance figure for seasonally adjusted initial unemployment insurance claims was 264,000, a decrease of 4,000 from the previous week’s unrevised level. The advance seasonally adjusted insured unemployment rate fell to 1.5% for the week ended May 28, a decrease of 0.1 percentage point from the previous week’s unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ended May 28 was 2,095,000, a decrease of 77,000 from the previous week’s unrevised level of 2,172,000.

Eye on the Week Ahead

FOMC Chair Janet Yellen’s remarks last week may prove to be a precursor to the Committee’s actions following this week’s meeting. A poor employment report may be enough to influence members to hold off on raising interest rates, unless retail sales and consumer prices show sufficient inflationary pressure for the Committee to justify a bump in rates.

What I’m Watching This Week – 6 June 2016

The Markets (as of market close June 3, 2016)

Friday’s dismal news on the labor front put a damper on expectations that the Fed will raise rates later this month, drove a pullback in domestic stocks, and sent Treasury yields into decline. Yet despite the day’s market dips, most indexes ended the week either flat or in the green.

In international news, the Organization of the Petroleum Exporting Countries concluded its highly anticipated meeting last Thursday without agreement on production caps. The European Central Bank (ECB) held rates steady, while raising the outlook for inflation by 0.1% and growth by 0.2%. ECB President Mario Draghi noted current stimulus measures appear to be working.

Crude oil (WTI) closed at $48.90 a barrel last week, down $0.66 over the previous week. The price of gold (COMEX) rose to $1,246.50 by late Friday afternoon, up from the prior week’s price of $1,215.30. The national average retail regular gasoline price increased to $2.339 per gallon on May 30, 2016, $0.039 above the prior week’s price but $0.441 below a year ago.

Market/Index 2015 Close Prior Week As of 6/3 Weekly Change YTD Change
DJIA 17425.03 17873.22 17807.06 -0.37% 2.19%
Nasdaq 5007.41 4933.50 4942.52 0.18% -1.30%
S&P 500 2043.94 2099.06 2099.13 0.00% 2.70%
Russell 2000 1135.89 1150.45 1164.13 1.19% 2.49%
Global Dow 2336.45 2344.41 2349.87 0.23% 0.57%
Fed. Funds rate target 0.25%-0.50% 0.25%-0.50% 0.25%-0.50% 0 bps 0 bps
10-year Treasuries 2.26% 1.85% 1.71% -14 bps -55 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • The United States saw just 38,000 new nonfarm payroll positions added in May, according to the Bureau of Labor Statistics. And while the unemployment rate fell 0.3 percentage point to 4.7%, it was not good news, as nearly half a million job seekers stopped looking for work. Employment increased in health care, mining continued to lose jobs, and employment in information decreased due to the Verizon strike. In addition, the number of persons employed part-time for economic reasons (also referred to as involuntary part-time workers) increased by 468,000 to 6.4 million in May. Average hourly earnings increased by $0.05 in May to $25.59. Earnings have risen an average of 2.5% over the past year.
  • Personal consumption expenditures (PCE)–or “consumer spending”–rose by 1% in April, the largest monthly gain in nearly seven years, according to the Bureau of Economic Analysis. PCE, which represents more than two-thirds of overall economic growth in the United States, increased $119.2 billion for the month. By comparison, PCE rose by just 0.2% in February and remained flat in March. Personal income increased $69.8 billion, or 0.4%, and disposable personal income (DPI) increased $63.5 billion, or 0.5%, in April.
  • The Conference Board Consumer Confidence Index®, which had decreased in April, declined further in May. The index now stands at 92.6, down from 94.7 in April. The Present Situation Index decreased from 117.1 to 112.9, while the Expectations Index declined from 79.7 to 79.0 in May. The percentage of consumers stating business conditions are “good” improved from 24.2% to 25.9%. However, those saying business conditions are “bad” also increased, from 18.2% to 21.6%.
  • The S&P/Case-Shiller U.S. National Home Price Index rose 5.2% on an annual basis in March, down from 5.3% in February. The 10-City Composite and 20-City Composite Indexes remained unchanged from the prior month, at 4.7% and 5.4%, respectively. “Home prices are continuing to rise at a 5% annual rate,” said David M. Blitzer, Managing Director & Chairman of the Index Committee at S&P Dow Jones Indices. “The economy is supporting the price increases with improving labor markets, falling unemployment rates, and extremely low mortgage rates.”
  • The Institute for Supply Management Manufacturing Index grew for the third consecutive month, registering 51.3% for May, an increase of half a percentage point over April. The New Orders Index came in at 55.7%, down slightly from the April reading of 55.8%. The Production Index fell 1.6 percentage points to 52.6%, while the Employment Index held steady at 49.2%. Readings over 50 indicate growth, while readings less than 50 point to slowdowns.
  • On the other hand, the Markit U.S. Manufacturing Purchasing Managers’ Index™ pointed to the weakest manufacturing performance since September 2009. At 50.7 in May, the index fell 0.1 percentage point from April’s reading. Markit Chief Economist Chris Williamson attributed the slowdown to falling export demand and growing uncertainty surrounding the presidential election.
  • The Institute for Supply Management Non-Manufacturing Index was 52.9% in May, 2.8 percentage points lower than the April reading of 55.7%. The Non-Manufacturing Business Activity Index decreased to 55.1%, 3.7 percentage points lower than April; the New Orders Index dropped 5.7 percentage points from the April reading of 59.9%; and the Employment Index decreased 3.3 percentage points to 49.7% from April.
  • The goods and services trade deficit was $37.4 billion in April, up $1.9 billion from $35.5 billion in March, revised, reported the U.S. Census Bureau and the Bureau of Economic Analysis. April exports were $182.8 billion, $2.6 billion more than March, and imports were $220.2 billion, an increase of $4.5 billion over the prior month. Year-to-date, the goods and services deficit decreased $8.1 billion, or 4.8%, from the same period in 2015. Exports and imports both decreased 5.1%, to $39.0 billion and $47.1 billion, respectively.
  • According to the U.S. Census Bureau, new orders for manufactured goods in April, up three of the last four months, increased $8.7 billion, or 1.9%, to $460.5 billion. This was the biggest jump in six months, driven largely by new orders for non-defense aircraft, which jumped by 65%. Shipments increased $2.2 billion, or 0.5%, to $456.8 billion. Unfilled orders increased $6.6 billion, or 0.6%, to $1,137.3 billion. Inventories decreased $0.5 billion, or 0.1%, to $620.8 billion. This followed a 0.1% March decrease.
  • In the week ended May 28, the advance figure for seasonally adjusted initial unemployment insurance claims was 267,000, a decrease of 1,000 from the previous week’s unrevised level of 268,000. The advance seasonally adjusted insured unemployment rate was 1.6% for the week ended May 21, unchanged from the previous week’s unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ended May 21 was 2,172,000, an increase of 12,000 from the previous week’s revised level.

Eye on the Week Ahead

Given last week’s unexpectedly disappointing employment numbers, all ears will be listening carefully to Janet Yellen’s remarks on Monday to gauge the future of interest rates. Key data releases include the second estimate on Q1 productivity and labor costs, as well as the April results from the Job Openings and Labor Turnover Survey (JOLTS).

Monthly market Review – May 2016

The Markets (as of market close May 31, 2016)

Following an up-and-down path similar to what occurred in April, the indexes listed here ultimately closed the month of May higher (except for the Global Dow). The month started with a run of positive returns, only to see much of the month’s gains given back by the end of May. Information from the Fed that interest rates could be raised as early as June could be interpreted as both a positive (improving economy) and a negative (higher lending rates), which seemed to flummox investors a bit. Several economic indicators picked up the pace in May as employment remained steady, the housing market gained some momentum heading into the summer months, and consumer prices increased along with mounting oil prices.

Long-term bond yields fluctuated during the month, ultimately closing at essentially the same yield as April’s closing return. The price of gold (COMEX) decreased by month’s end, selling at $1,217.50–about $77 below April’s end-of-month price of $1,294.90.

Market/Index 2015 Close Prior Month As of 5/31 Month Change YTD Change
DJIA 17425.03 17773.64 17787.20 0.08% 2.08%
Nasdaq 5007.41 4775.36 4948.05 3.62% -1.19%
S&P 500 2043.94 2065.30 2096.96 1.53% 2.59%
Russell 2000 1135.89 1130.84 1154.79 2.12% 1.66%
Global Dow 2336.45 2377.38 2339.71 -1.58% 0.14%
Fed. Funds rate target 0.25%-0.50% 0.25%-0.50% 0.25%-0.50% 0 bps 0 bps
10-year Treasuries 2.26% 1.83% 1.84% 1 bps -42 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

The Month in Review

  • Employment: The labor market cooled a bit following its strong run in March based on the latest information from the Bureau of Labor Statistics. Total nonfarm payroll employment added 160,000 new jobs in April–down 48,000 from the revised 208,000 in March. Employment increased in professional and business services, financial activities, and health care. Job losses occurred in government and mining. The unemployment rate remained unchanged at 5.0%. There were 7.9 million unemployed persons (virtually unchanged from March), while the number of long-term unemployed declined by 150,000 to 2.1 million in April. The labor force participation rate fell slightly to 62.8% from 63.0% in March. The average workweek increased to 34.5 hours from 34.4 hours in March. Average hourly earnings for all employees on private nonfarm payrolls increased by $0.08 to $25.53. Over the year, average hourly earnings have risen by 2.5%.
  • FOMC/interest rates:The Federal Open Market Committee did not meet in May as the target range for the federal funds rate remained at 0.25% to 0.50%. However, the minutes from its April meeting seem to indicate that the Committee will not hesitate to raise rates at its next meeting in June if warranted by favorable economic conditions.
  • Oil: Crude oil prices continued pushing higher during May, as prices surged to over $50 per barrel, only to fall back to $48.83 per barrel by the close of the month. This is still higher than the April closing price of $45.92 per barrel.
  • GDP/budget: The second estimate of the GDP for quarter one revealed only a little better growth at 0.8%, compared to the first estimate of 0.5%. The increase from the first estimate is attributable to positive revisions to residential investment and exports with a decrease in private inventory investment. While this report is better than the first estimate, it is not indicative of significant economic expansion. The year-to-date federal deficit was $355.0 billion in April, more than 25% higher than the deficit over the same period last year, despite a $106.5 billion surplus in April. For the month, the government took in $438.4 billion in receipts and paid out $332.0 billion in expenditures. Compared to March, total receipts in April increased by $210.6 billion, while government expenditures were $3.9 billion lower than March’s total outlays.
  • Inflation: The latest inflation rate for the United States based on the Consumer Price Index is 1.1% through the 12 months ended April 2016 as published by the Bureau of Labor Statistics–still below the Fed’s stated target rate of 2.0%. For April, the Consumer Price Index rose 0.4% from March. The index for all items less food and energy (core prices) increased 0.2% in April. Core prices rose 2.1% over the 12 months ended in April, compared to a 2.2% increase for the 12 months ended March. The Producer Price Index, which measures the prices companies receive for goods and services, rose 0.2% in April following a 0.1% decline in March. Prices for services edged up 0.1% for the month, while prices for goods rose 0.2% in April following a similar increase the prior month. Retail sales for goods and services increased 1.3% in April, which is 3.0% above April 2015. Retail trade sales were up 1.4% from March and up 2.7% from last year. Nonstore retailer sales (online sellers) were up 10.2% from April 2015, while gasoline stations were down 9.4% from last year. Personal income increased $69.8 billion, or 0.4%, and disposable personal income (DPI) increased $63.5 billion, or 0.5%, in April, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $119.2 billion, or 1.0%. In March, personal income increased $56.7 billion, or 0.4%, DPI increased $49.6 billion, or 0.4%, and PCE increased $3.7 billion, or less than 0.1%, based on revised estimates.
  • Housing: The housing sector gained momentum in April, influenced by low mortgage rates and solid employment gains. New home sales grew at a pace unseen in the last eight years, jumping 16.6% for the month compared to March. Prompted by increasing demand and limited supplies, the median sales price for new homes increased 9.7% from a year earlier to $321,100. With roughly 243,000 new homes available for sale, the supply is down to 4.7 months compared to 5.5 months in March. Sales of existing homes also increased in April, but not at quite the pace as new home sales. Existing home sales increased 1.7% in April to an annual rate of 5.45 million compared to 5.36 million in March. Existing home sales are up 6.0% from a year ago. The median existing-home price for all housing types in April was $232,500, up 6.3% from April 2015. The 2.14 million existing homes available for sale represents a supply of 4.7 months, a slight increase from the 4.4-month supply in March. Single family home starts increased 6.6% in April as did the number of building permits issued, which increased 3.6% for the month.
  • Manufacturing: Manufacturing and industrial production have been relatively weak sectors in the economy for quite some time, although that trend may be changing. According to the Federal Reserve’s report for April, industrial production increased 0.7% following a 0.6% decline in March. However, total industrial production in April was 1.1% below its level from a year earlier. Despite the recent increase in industrial production, manufacturers were not overly enthused as reflected in a couple of purchasing managers’ indexes. The Markit U.S. Manufacturing Purchasing Managers’ Index™ was 50.8 in April, down from 51.5 for March. The Institute for Supply Management PMI for April also came in at 50.8%, falling 1.0 percentage point below its March reading. Durable goods orders increased 3.4% for April, following a 0.8% increase in March. April’s gain in new orders for manufactured goods was led by an 8.9% increase in new orders for transportation equipment. Excluding transportation, durable goods orders were up 0.4% for the month. Year-to-date, new orders for durable goods are up 0.8%.
  • Imports and exports: Based on the advance report from the Census Bureau, the international trade in goods deficit grew to $57.5 billion in April versus a revised deficit of $55.6 billion in March. The trade in goods deficit for April is reflective of $119.3 billion of exports and $176.8 billion of imports. Based on advance figures, the trade in goods deficit for the first four months of 2016 sits at $239.0 billion. Rising fuel prices influenced the price index for both imports and exports in April, according to the Bureau of Labor Statistics. Prices for goods manufactured abroad and purchased here (import prices) rose 0.3% for the month following a comparable increase in March. Export prices for goods made here but sold abroad increased 0.5% in April. This is the first monthly increase in export prices since last May.
  • International markets: Greece and its creditors were able to reach a new deal that allows the economically embattled country to receive new loans while outlining terms for future debt relief. A U.S. bipartisan congressional bill was introduced that would allow Puerto Rico to restructure its $70 billion debt. The proposed legislation would not involve federal funding, but would allow the island to write down some of its debt. In an attempt to invigorate its sluggish economy, the Japanese prime minister has proposed a significant stimulus package. However, the 1.7% growth in the first quarter of Japan’s GDP may increase resistance to that stimulus proposal.
  • Consumer sentiment: The Conference Board Consumer Confidence Index® for May fell to 92.6 from April’s revised 94.7 due to consumers rating current conditions less favorably than in April. On the other hand, the University of Michigan’s Index of Consumer Sentiment increased to 94.7 in May, compared to 89.0 for the prior month. There have been only four prior months since January 2007 in which the Index of Consumer Sentiment was higher than in May 2016.

Eye on the Month Ahead

Looking ahead, June may prove to be a pivotal month for the rest of the year. Will the current economic trends be sufficient to prompt the Fed to raise interest rates in June for the first time this year? Also scheduled for June is the vote over the UK’s membership in the European Union. The European Central Bank meets in June, as does the Organization of the Petroleum Exporting Countries–each event capable of impacting the economy and equities markets of the United States and several foreign nations.