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CCCM INVESTMENT COMMITTEE MEETING

July 16, 2018

U.S. Markets: Most of the major U.S. benchmarks finished the week with gains, despite substantial volatility. Large cap indexes widely outperformed the smaller cap indexes, and the narrowly focused Dow Jones Industrial Average performed the best of all. The Dow Jones Industrial Average added 2.3% to last week’s gain rising over 560 points to close at 25,019. The NASDAQ Composite added 137 points finishing the week at 7,825, a gain of 1.8%. By market cap, the large cap S&P 500 added 1.5% and the mid cap S&P 400 index gained 0.3%, but the small cap Russell 2000 index dropped -0.4% - the lone loser of the week.

U.S. Economic News: After a small spike last week, the number of Americans seeking new unemployment benefits fell by 18,000 to 214,000, back near 49-year lows, according to the Labor Department. The reading also came in lower than expectations as economists had forecast a smaller decline to 226,000. The more stable monthly average of new claims slipped by 1,750 to 223,000. Continuing claims, which counts the number of people already receiving benefits, also declined by 3,000 to 1.74 million. That number is reported with a one-week delay. Overall, the number of claims was the third lowest of the nine-year old economic expansion that began in mid-2009. The last time jobless claims were consistently lower was at the height of the Vietnam War in 1969.

In what may sound like a paradox, Americans are quitting their jobs at the fastest rate since 2001, yet economists say that’s a good thing! Economists state that, for the most part, workers only leave a job if they are confident of getting a better, higher paying one. The percentage of people in the private sector who left their jobs by choice rose to 2.7% in May, up 0.2%, while the so-called “quits rate” among all workers ticked up to 2.4% - both hit their highest levels in 17 years. Senior U.S. economist Michael Pearce at Capital Economics noted that rising pay for workers could spur inflation higher. Pearce wrote in a research note, ”The rise in the job quits rate points to wage growth accelerating to 3% by the end of the year.” In addition, the Labor Department reported the number of job openings retreated slightly from a record high to 6.64 million as companies continued to fill open positions. Over 5.7 million people were hired in May, up 170,000 from April and the biggest gain in 17 years.

Consumer credit growth accelerated sharply in May as borrowing among the nation’s consumers increased by $24.6 billion, the Federal Reserve reported. The increase was more than double economists’ forecasts and the fastest pace in six months. The annual growth rate is up to 7.6%, which is the fastest pace of credit growth since November. Economists had been expecting just a $12.4 billion gain. In the details, revolving credit (like credit cards) surged in May by rising by 11.4% - also the biggest increase since November. Non-revolving credit (like auto and student loans) rose 6.3%. Michael Faroli, chief U.S. economist at JP Morgan Chase released a note stating most of the acceleration in economic growth in the second quarter was due to consumer spending “snapping out of its brief first quarter funk” and that recent data suggests that consumers were using their credit cards to fuel that spending.

Prices of imported goods sank in June on lower food and energy costs, but the drop is not expected to last as trade and tariff tensions continue to mount. The Bureau of Labor Statistics reported U.S. import prices decreased 0.4% in June, following a 0.9 increase in May. Despite the downturn, overall import prices advanced 4.3% over the past year. Excluding fuel, import prices were up just 1.5% over the same period. Analysts note the decline could have been the result of foreign suppliers trying to ship more goods to the U.S. before looming tariffs took effect, or they could have lowered prices ahead of the tariffs to keep costs down for end-use customers. Also influencing import prices is a stronger dollar, as Gregory Daco, chief U.S. economist at Oxford Economics notes, “A stronger dollar has a depressing effect on imports prices, especially for consumer goods.”

Sentiment among the nation’s small business owners dampened just slightly last month, according to the National Federation of Independent Business’ (NFIB) small-business sentiment index, but remained at historically high levels. The NFIB reported its index fell a slight 0.6 point to 107.2, its sixth highest reading in the history of the survey. NFIB President Juanita Duggan stated, “Small business owners continue to report astounding optimism as they celebrate strong sales, the creation of jobs, and more profits. The first six months of the year have been very good to small business thanks to tax cuts, regulatory reform, and policies that help them grow.”

At the wholesale level, the cost of goods and services rose in June at their highest yearly rate in almost seven years. The Labor Department reported its Producer Price Index (PPI) for final demand rose 0.3%, lifted by gains in services, motor vehicles, and gasoline prices. In the 12 months through June, the PPI advanced 3.4%, its largest gain since November 2011. Economists had forecast a 0.2% gain and a 3.2% annual increase. Core PPI, which excludes the often-volatile food, energy, and trade services categories, rose 0.3% last month. Core PPI has risen 2.7% over the past year. Analysts note that the Federal Reserve will be taking note of the report as it shows that inflation is rising amid the backdrop of a labor market that is at or very near full employment.

At the consumer level, inflation hit a 6-year high according to the Bureau of Labor Statistics’ Consumer Price Index (CPI). Consumer prices rose last month to their highest annual rate since 2012, a sign that the economy is running hotter than at any time since the Great Recession. The increase in the cost of living rose 0.1% to an annualized 2.9% - its highest level in more than six years. Economists had expected a 0.2% gain. Last year at this time, the index stood at just 1.6%. Core CPI, which strips out food and energy, advanced 0.2% last month. Core CPI was up a more modest 2.3% over the past year—its highest reading in a year and a half. Overall, inflation shot up over the past year owing to rising oil prices, higher rents, more expensive medical care and growing bottlenecks in the economy for skilled workers and shortages of certain key materials.

Sentiment among the nation’s consumers hit a six-month low as concerns over tariffs and the possibility of a global trade war weighed. The University of Michigan’s consumer sentiment index fell 1.1 points to 97.1 this month, missing forecasts for a reading of 98.9. The reading was its lowest since January. In the details, the biggest drop came in the index for current conditions, which fell 2.6 points to 113.9. The University of Michigan reported that negative concerns over the impact of tariffs have accelerated, with those concerns coming particularly from households in the top third of incomes. Among those who expressed negative views of the tariffs, the expectations index was 30.5 points below those who didn’t mention tariffs as a concern at all.

Finally: The homeownership rate among millennials ages 25-34 is around 8% lower than when both Generation X and the baby boomers were when in the same age range. A new report by the policy research group Urban Institute, looked to explain why. What they found was a variety of reasons, some of them financial and some of them lifestyle in character. Delayed marriages were a primary cause, as millennials are marrying later and marrying less than their older counterparts. Today the median age for a first marriage is closer to 30, while in 1960, the average age was in the early 20’s. In addition, today’s millennials are in no hurry to reproduce. The share of married households with children, aged 18-34 dropped to 25% in 2015, down from 37% in 1990. In addition, the unprecedented amount of student debt millennials have taken on also reduces their chances of owning a home of their own. The researchers at the Urban Institute found that if a person's education debt went from $50,000 to $100,000, their chance of home ownership declines by 15 percentage points. The following chart (from CNBC.com) reports the reasons millennials themselves give for not participating in home ownership.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The S&P MidCap 400 is a subset of the S&P 500 and serves as a barometer for the U.S. mid-cap equities sector. The Russell 2000 index is an unmanaged index of small cap securities which generally involve greater risks. NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. Investors may not make direct investments into any index. Past performance may not be indicative of future results. Individual investor's results will vary. Opinions expressed are those of the author and are not necessarily those of Raymond James Financial Services, Inc.


July 9, 2018

U.S. Markets: U.S. stocks were volatile during the holiday-interrupted week but finished predominantly on the upside. Continuing the pattern of recent weeks, both the technology-heavy NASDAQ Composite index and smaller-cap benchmarks outperformed. The Dow Jones Industrial Average added 185 points to close at 24,456, up 0.8% for the week. The NASDAQ Composite rebounded from last week’s decline, rising 2.4% to 7,688. By market cap, the large cap S&P 500 index gained 1.5%, while the mid cap S&P 400 index added 1.9% and the small cap Russell 2000 surged 3.1%.

U.S. Economic News: The U.S. added 213,000 jobs in June, another healthy gain that shows companies are still eager to fill open positions despite the dwindling pool of available workers. The gain exceeded economists’ forecasts of an increase of 200,000. However, in a bit of a paradox the unemployment rate actually rose 0.2% to 4% after hitting an 18-year low in May. The jobless rate rose due to more than 600,000 workers re-joining the labor force, in another sign, in my opinion, of the health of the labor market. The shrinking pool of labor is slowly forcing companies to raise pay as the competition for talent intensifies, but they are still managing to keep labor costs down. In the details of the report, white-collar professional firms filled 50,000 jobs last month to lead the way in hiring. Manufacturers, health-care providers, and construction companies rounded out the other big gainers with 36,000, 25,000, and 13,000 new jobs added, respectively. The only segment of the economy to reduce employment was retail, where companies shed 22,000 jobs after hiring 25,000 workers in the prior month.

Initial claims for new unemployment benefits hit a 6-week high last week but remained near their lowest levels in decades. The Labor Department reported that initial jobless claims rose by 3,000 to 231,000, exceeding economists’ forecasts of a 225,000 reading. The less volatile monthly average of claims increased by 2,250 to 224,500. Claims have remained under the 250,000 level for over nine months, signaling an extremely robust labor market. The number of people already receiving benefits, known as continuing claims, climbed by 32,000 to 1.74 million. That number is reported with a one-week delay.

Private-sector employment also remained solid last month, according to the latest data from private payroll processor ADP. ADP reported the private sector added 177,000 jobs in June, just slightly less than the 190,000 jobs economists had forecast. Details within ADP’s report showed that small firms added 29,000 positions, medium-sized businesses added 80,000, and large companies added 69,000. So far this year, employment gains have averaged 207,000 jobs per month. Mark Zandi, chief economist at Moody’s Analytics, stated he believes the U.S. unemployment rate is heading to the low 3% range— a stunningly low level that would be the lowest since the Korean War.

American manufacturers grew at their fastest pace in four months in June but report they’re running into trouble getting supplies delivered on time due to transportation bottlenecks, according to the Institute for Supply Management (ISM). The ISM manufacturing index rose to 60.2 last month, up 1.5 points from May. That matches the second highest level of the current economic expansion that began in mid-2009. The index hit a 14-year high in February. In the details of the report, new orders and employment remained strong, while supplier deliveries rose to a 14-year high. Ian Shepherdson, chief economist at Pantheon Macroeconomics summed up the report simply, “In one line: strong growth, but supply chains are stretched.”

In the services sector, most companies saw a pickup in business last month according to the ISM non-manufacturing index. The non-manufacturing index rose 0.5 points to 59.1 in June, beating market forecasts of 58.3. June’s reading was the highest since February as business activity and new orders rose faster and price pressures eased. Numbers over 50 are viewed as positive for the economy, while anything over 55 is considered exceptional. In the details, both production and new orders increased in June, and employment remained strong. The services sector, which includes professional services, healthcare and other non-manufacturing industries, makes up about 80% of US gross domestic product (GDP).

The Commerce Department reported that new orders for U.S.-made goods rose in May, as strong demand for machinery drove order numbers higher. Factory goods orders increased 0.4% in May and data for April was revised upward to just a 0.4% decrease, halving the 0.8% decline previously reported. Manufacturing, which accounts for about 12% of the U.S. economy, is being boosted by strong domestic and global demand but growing shortages of workers as well as import tariffs are starting to weigh on the supply chain. The Trump administration has imposed tariffs on a range of imported goods, including steel and aluminum, to protect domestic industries from what it says is unfair competition from foreign manufacturers.

Construction spending edged up 0.4% in May according to the latest data from the Commerce Department. The uptick in May brought total construction spending to a seasonally-adjusted all-time high of $1.31 trillion—4.5% higher than a year ago. In the details, total private construction rose 0.3% with residential projects up 0.8% in May. New single-family home construction rose 0.6%, while the volatile multi-unit sector, i.e. apartments and condominiums, jumped 1.6%. Economists are forecasting that construction spending will contribute to overall growth this year even though interest rates are rising. Jennifer Lee, senior economist for BMO Capital Markets, however wasn’t impressed. She noted the 0.4% increase in June missed expectations of a 0.6% rise, and that April’s number was revised down from 1.8% to just 0.9%.

Finally: Analysts are beginning to take note of a concerning development in the market— extremes in market turnover. Trading is through the roof in many major market indexes and across asset classes. In the S&P 500 index alone, investors traded more than $2.9 trillion worth of shares since the beginning of the year—a level last seen in early 2008, right before the financial crisis really hit. JP Morgan Chase strategist Nikolaos Panigirtzoglou wrote in a note, “Market turnover tends to be high when uncertainty is high, as institutional investors continuously reshuffle their portfolios. Negative growth revisions coupled with political and policy risks including the Italian crisis and trade war risks are creating a lot more uncertainty this year relative to last year.”

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

Opinions expressed in the article are those of the Chapman and Cardwell Capital Management and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Investing involves risk and investors may incur a profit or a loss. Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks. Investors may not make direct investments into any index. Past performance may not be indicative of future results. Individual investor's results will vary. Commodities are generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of a diversified portfolio. There may be sharp price fluctuations even during periods when prices overall are rising. Gross Domestic Product (GDP) is the annual market value of all goods and services produced domestically by the US. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market. The S&P Mid Cap 400 Index is a capitalization weighted index that measures the performance of the mid-range sector of the U.S. stock market. The Russell 2000 index is an unmanaged index of small cap securities which generally involve greater risks.



In the ever-changing landscape of finance we must ensure our clients are properly invested based upon their investment goals and objectives.

Peter Chapman




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