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Market Update August 2018

Equities Remain Resilient – Domestic Stock Market

Trade concerns affecting equities were overshadowed by rising corporate  earnings and improving economic data. U.S. equities ended with gains across all  size companies, small to large caps. Small caps have advanced the most year to  date, yet large caps outperformed in July. Optimistically, all sectors posted  gains in July, with industrials leading. As a reversal from the second quarter,  value stocks outperformed growth stocks in July, signaling a rotation to less  growth orientated companies.

Half of the largest ten U.S. companies ranked by market value are technology  companies, representing over $4 trillion in market value. The other top ten  companies include financials, banking and energy.

The telecom sector will be renamed the communications services sector, a  better representation of the evolvement of the industry and technology driving  it. Traditionally known as a steady sector with a few companies, the sector will  now include many more companies and with ample growth orientation, accounting  for over 10% of the S&P 500 Index.

Rising input costs are starting to impact certain sectors, as import tariffs  are adding to various metal and commodity components. It is too soon to tell  which companies may be passing along the higher material costs to consumers.  (Sources: S&P, Dow Jones, Bloomberg,  https://fred.stlouisfed.org/categories/32255)

Good News, More Workers Are Quitting Their Jobs – Employment Market  Review

For the first time since 2000, there are more job openings than unemployed  persons to fill them. Job openings rose to 6.7 million positions in April, more  than the 6.3 million that were unemployed in April, the most recent data. A  shrinking workforce is becoming a rising factor, due to retiring baby boomers  and students deciding to stay in school longer before joining the workforce. The  tighter labor market is also leading to a growing number of workers quitting  their current job. Each month the U.S. Department of Labor releases employment  data which includes how many workers are actually quitting their jobs. The data  is considered a critical barometer of the labor market’s health and an indicator  of economic growth.

The “quits rate” essentially measures how many workers quit their jobs  voluntarily as opposed to being fired or laid off. Many economists and analysts  follow the quits rate closely because it reveals how confident workers are.  These same workers are also the consumers that the Fed monitors to determine if  their confidence is allowing them to spend more, thus lifting economic growth.  The most current quits rate rose to 2.4 in May, the highest monthly reading in  over 10 years. Following the financial crisis in 2008, the quits rate dropped as  workers were less confident in leaving a job they had rather than look for  another job opportunity. (Sources: U.S. Labor Department)

Rates Gradually Rise – Global Debt Markets

It is a possibility that additional Federal Reserve rate increases this year  may reduce the difference, also known as the spread, to nearly zero between  short-term and long-term rates. The similarity of short-term and long-term rates  is a barometer for economists and analysts in determining economic growth  expectations.

The broad retraction of fiscal stimulus by global central banks in the U.S.,  Europe, and Asia have led to less liquidity for bonds among some of the emerging  market countries. Debt owed in U.S. dollars by foreign countries makes it more  expensive to pay back as the U.S. dollar rises. Trade tensions are affecting the  Chinese debt market, as corporate bonds are defaulting at a rising rate.  Overextended Chinese companies ladened with debt are also seeing the effects of  a weaker Chinese currency, the yuan, which makes repayment of debt more costly  in the global markets.

U.S. Treasury bond yields rose in late July propelled by strong economic  growth data and expected continued rate rises signaled by the Federal Reserve.  The yield on the 10-year Treasury rose to 2.96% at July’s end, close to piercing  the 3% point as it did in May. (Sources: Fed, Dept. of Commerce)

New Home Sales Are Dropping – Housing Market Update

Data from the Department of Housing and Urban Development revealed that new  home sales have been falling. Sales for new homes have been affected as mortgage  rates have risen and a lack of supply is still an issue. Labor shortages of  qualified workers throughout the housing industry have placed a strain on the  construction of new homes, an issue that  is not prevalent with existing home sales.

Affordability is becoming an issue as rates have risen, driving up mortgage  payments. Even though prices have fallen with the median priced home at $302,100  this past month down from $322,900 a year ago, the current 30-year fixed  conforming rate has risen to 4.54% from 3.92% in the same period. Lower home  prices are offsetting some higher mortgage rates in certain parts of the  country.

Home prices are becoming out of reach for many first  time buyers, especially younger singles and couples that are an essential  catalyst for an expanding housing market. According to Freddie Mac, higher home  prices on lower priced homes have reduced affordability for younger home buyers.  New home sales, not existing home sales, is the housing sales component measured  into GDP. Existing home sales have also dropped in the past year, by over 2%.  Government data includes new home sales because of the new expenses created,  such as property tax, first time mortgage, and utilities. (Sources: U.S. Census  Bureau, U.S. Department of Housing, Freddie Mac)

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