- • Retail Sales, released on Tuesday, came in below economist expectations with a -1.3% print.
- • The Producer Price Index (PPI) came in above forecasts with the month over month print of 0.8% and a 6.6% year over year print, versus economist forecasts of 0.6% and 6.2% respectively.
- • Building permits missed forecasts with a print of 1.68 million versus the 1.73 million expected.
- • Housing Starts also missed forecasts with a print of 1.572 million versus the 1.63 prediction for the month, a 3.6% increase.
INSIGHT: Consumers seem to be shifting away from spending on goods, such as electronics and furniture, towards services, such as entertainment and travel. We find this to not come as a surprise, as it can be expected that consumers would shift their consumption habits towards the services industry as the country continues to emerge from the pandemic and more states reopen their economies. With the PPI print coming in above forecasts, we view this as further proof that the economy is still in the early stages of its reopening, causing disruption to supply chains. These disruptions could continue to lead to high PPI prints as demand should still outweigh supply in the coming months. We see a similar supply and demand imbalance in the housing industry, as highlighted by the building permits print missing forecasts. With surging lumber prices and uncertainty behind the availability of necessary supplies, moving forward, we believe that building permits and new housing starts may continue to miss forecasts. To further this argument, builder confidence has come down from the historic highs hit in late 2020. Overall, we believe that once the issues surrounding supply chains are resolved, the demand for housing will remain strong. This should provide significant upside potential for 2022.
A LOOK FORWARD(1)
- • Existing home sales will be released on Monday with economists forecasting 5.71 million for the month of May.
- • New Home sales will be released on Wednesday and are expected to increase from the prior month to 875,000.
- • Personal Income is expected to decrease by -2.8% during the month of May while personal spending is forecasted to increase by 0.3% over the same period.
- • Personal Consumption Expenditures (PCE) deflator is expected to increase month over month by 0.6%.
INSIGHT: New home sales are expected to increase 1.4% to 875,000 for the month of May. This highlights the continuing strength of demand for housing by consumers. However, as prices for existing homes remain near record highs, economists forecast that existing sales will decline month over month as consumers may be hesitant to enter the market at such elevated price levels. Elevated prices are showing up not only in the housing market, but in multiple sectors of the economy. The PCE deflator, one of the Federal Reserve System’s (FED) favorite measures of inflation, is expected to increase by 0.6% month over month. Economists believe that price increases may very well impact the amount of money that consumers have in their pockets, therefore, it is important to see an increase in personal income if prices continue to rise. However, the main key to sustained economic activity is consumer spending. As states lift restrictions, consumers should continue to spend, which should continue to support growth in the economy.
- • U.S. equities moved lower this week as indicated by the S&P 500 which was down -1.87% on the week.
- • In the U.S., smaller sized companies underperformed their larger-sized counterparts, as the Russell 2000 index fell 4.17% on the week.
- • International stocks as measured by the MSCI EAFE were negative on the week, down -2.40%, underperforming domestic stocks.
- • Emerging market stocks were also negative on the week with the MSCI EM index down -1.45%.
- • U.S. investment grade bonds were positive last week with the Bloomberg Barclays U.S. Aggregate Bond index up +0.11%.
AT A MINIMUM: The Treasury Department maintains a “checking account,” aka the Treasury General Account with a minimum balance of $150 billion. As of Wednesday 6/09/21, the Treasury General Account had a balance of $730 billion. The US government is forecasted to spend $20 billion a day during fiscal year 2021, i.e., the 12 months ending 9/30/21 (source: Treasury Department).
HALF: 51% of the $64.2 trillion forecasted by the Biden White House that the US government will spend over the next 10 fiscal years, i.e., fiscal year 2022 through and including fiscal year 2031, are outlays for Social Security, Medicare and Medicaid (source: Budget of the U.S. Government released 5/28/21).
FEWER CHOICES: There were 1.16 million existing homes for sale nationwide as of 4/30/21. The 1.03 million “for sales” as of 2/28/21 was the lowest level ever reported for a statistic that has been tracked since 1999 (source: National Association of Realtors).
NO TURNING BACK: 42% of 1,046 full-time American workers surveyed in early March 2021 said they would quit their jobs if their employer did not allow them to continue to “work from home” permanently and they would seek new employment with a company that does (source: Prudential’s Pulse of the American Worker Survey).
Building Permits: This concept tracks the number of permits that have been issued for new construction, additions to pre-existing structures or major renovations. These statistics are based on the number of construction permits approved.
Producer Prices – PPI (headline and core): Producer prices (output) are a measure of the change in the price of goods as they leave their place of production (i.e. prices received by domestic producers for their outputs either on the domestic or foreign market).
Personal Income: Consumer or Household Income (often referred to as personal income) tracks all income received by households including such things as wages and salaries, investment income, rental income, transfer payments, etc. This concept is not adjusted for inflation.
Personal Spending: Consumer or Household Spending (also referred to as consumption) tracks consumer expenditures on goods and services. This concept is not adjusted for inflation.
PCE (headline and core): PCE deflators (or personal consumption expenditure deflators) track overall price changes for goods and services purchased by consumers. Deflators are calculated by dividing the appropriate nominal series by the corresponding real series and multiplying by 100.
Retail Sales: Retail sales (also referred to as retail trade) tracks the resale of new and used goods to the general public, for personal or household consumption. This concept is based on the value of goods sold. Housing Starts: Housing (or building) starts track the number of new housing units (or buildings) that have been started during the reference period.
Existing Home Sales: This concept tracks the sales of previously owned homes during the reference period. Total existing home sales include single-family homes, townhomes, condominiums and co-ops. All sales are based on closings from
Multiple Listing Services. Foreclosed homes are only counted in the inventory if the bank is working with a realtor. Foreclosed homes that sell via auction (or other closings outside of the Multiple Listing Services) are not included.
New Home Sales: This concept tracks sales of newly constructed homes during the reference period. The Implicit US index is computed by taking the number of house sold in the US and dividing it by the seasonally adjusted number of houses sold in the US. period.
The Federal Reserve System: The central bank of the United States. It performs several general functions to promote the effective operation of the U.S. economy and, more generally, the public interest.
S&P 500: The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
NASDAQ: The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select,
Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.
Russell Mid-Cap: Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index, which represent approximately 25% of the total market capitalization of the Russell 1000 Index.
Russell 2000: The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 total market capitalization. The real-time value is calculated with a base value of 135.00 as of December 31, 1986. The end-of-day value is calculated with a base value of 100.00 as of December 29, 1978.
MSCI EAFE: The MSCI EAFE Index is a free-float weighted equity index. The index was developed with a base value of 100 as of December 31, 1969. The MSCI EAFE region covers DM countries in Europe, Australasia, Israel, and the Far East. MSCI
EM: The MSCI EM (Emerging Markets) Index is a free-float weighted equity index that captures large and mid-cap representation across Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
Bloomberg Barclays US Agg Bond: The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).
Bloomberg Barclays High Yield Corp: The Bloomberg Barclays US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded.
Bloomberg Barclays Global Agg: The Bloomberg Barclays Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.
Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. Past performance cannot guarantee future results. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect again loss. In general, the bond market is volatile; bond prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed-income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Vehicles that invest in lower-rated debt securities (commonly referred to as junk bonds or high-yield bonds) involve additional risks because of the lower credit quality of the securities in the portfolio. International investing involves special risks not present with U.S. investments due to factors such as increased volatility, currency fluctuation, and differences in auditing and other financial standards. These risks can be accentuated in emerging markets. The statements provided herein are based solely on the opinions of the Advisor Group Research Team and are being provided for general information purposes only. Neither the information nor any opinion expressed constitutes an offer or a solicitation to buy or sell any securities or other financial instruments. Any opinions provided herein should not be relied upon for investment decisions and may differ from those of other departments or divisions of Advisor Group or its affiliates. Certain information may be based on information received from sources the Advisor Group Research Team considers reliable; however, the accuracy and completeness of such information cannot be guaranteed. Certain statements contained herein may constitute “projections,” “forecasts” and other “forward-looking statements” which do not reflect actual results and are based primarily upon applying retroactively a hypothetical set of assumptions to certain historical financial information. Any opinions, projections, forecasts and forward-looking statements presented herein reflect the judgment of the Advisor Group Research Team only as of the date of this document and are subject to change without notice.
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(1) Data Obtained from Bloomberg as of 6/18/2021