Capital Market Commentary – August 2017

By: Stephen Clinton, President, Capital Market Securities, Inc.

Market Update
The U.S. has entered the ninth year of economic expansion. While the growth has not been spectacular, it has been steady. GDP expanded at a 2.6% annual rate in the second quarter. The GDP growth in the current recovery has averaged 2.1%. This compares to the 3.6% average of the 1990’s recovery and the 4.9% average for the 1960’s expansion. (These are the most recent economic recoveries of comparable length to the current expansion.)

  • American’s largest companies were reported to be on pace to post two consecutive quarters of double-digit profit growth for the first time since 2011. Factors explaining the growth in profitability include a weaker dollar that helped U.S. exports, limited wage growth, and cost cutting programs.
  • Unemployment was reported at 4.4% in June, near the lowest rate in a decade.
  • Despite nearing full employment, wage growth has increased only modestly. It was reported that wages increased .5% in the second quarter.
  • At the Federal Reserve meeting in July, the Fed held interest rates unchanged but announced that it soon will begin to shrink its securities portfolio. The Fed currently holds more than $4 trillion of investments; a large portion of these were purchased as part of the Fed’s quantitative easing programs.
  • Consumer spending rose at a 2.8% pace in the second quarter, an increase from 1.9% in the first quarter. However, concerns remain about the spending outlook at a time of soft wage growth, stalling car sales, and a growing overhang of auto and student-loan debt.
  • U.S. business investment rose for the second straight quarter. In the second quarter, nonresidential fixed investment advanced at a 5.2% pace. That comes on the heels of a 7.2% gain the prior quarter. The continuation of strong business spending suggests firms have confidence in the durability of the economic expansion.
  • The U.S. housing market continues to improve. After falling throughout the usually busy spring season, the monthly index of signed contracts to purchase existing homes increased 1.5% in June compared with May. The Case-Shiller Index, which measures the increase in home prices across the country, rose 5.6% in the 12 months ending in May.
  • Overall, inflation continues to be held in check. The U.S. inflation index was 1.4% in May, well below the Fed’s 2% target.

The stock market has reached all-time highs. This has occurred despite the lack of action on President Trump’s plans for lowering taxes and economic stimulus. Should these initiatives be enacted, 2017 should be a very good year for investors.

Interesting Tid Bits ƒƒ

  • The New York Times recently reported that homeowners now stay in their homes for an average of 8½ years, up from the 3½ year average in 2008.
  • Twenty years ago, there were 7,322 listed public companies in the U.S. At the end of 2016, there were only 3,671 companies publicly traded on U.S. exchanges.
  • Deer & Co., the maker of farming equipment, is the fifth largest agricultural lender. This is in addition to the billions that they lend to farmers to fund purchases of their farming equipment.
  • It is widely anticipated that the Libor index will be phased out over the next five years. Libor is used to set the price on trillions of dollars of loans.

Short-term interest rates have moved up in response to the Fed’s actions of increasing short-term rates with the 3-month T-Bill ending July at 1.07%.

The 10-year T-Note ended July at 2.30%. The yield curve has flattened this year with the 10-year T-Note falling 14 basis points while short-term rates moved up 56 basis points.

The general stock market reached historic highs in July. The Dow Jones Industrial Index ended July 31 at an all-time high and was up 10.77% for the year. The Nasdaq Index closed up 17.93% for the year. Banks have under-performed the general stock market this year. The Nasdaq Bank index was down 3.10% for the year. However, since the election, bank stocks are up 22.50%, which is a larger increase than the Dow Jones Industrial Index since the election.

Merger and Acquisition Activity
Through July there were 147 bank and thrift announced merger transactions. This compares to 151 deals for the comparable period in 2016. Despite the slightly lower number of deals, the total assets involved in transactions increased from $109 billion to $124 billion. The median price to tangible book for transactions involving bank sellers was 162%.