Market Update July 2017

 

 

Courtesy of our friend and colleague Greg Naylor:

 

 

 

July was generally a month of continued asset gains, although some institutional investors are starting to suggest individuals start dialing back risk.  In the U.S., repeal of Obamacare failed to pass again.  Optimists hope this means that the government will move on to tax reform, while pessimists worry that the repeal-failure means tax reform is less likely.  Despite the worry areas, the economy continues to grow and continues to add jobs.

 

Stocks & Bonds

 

The U.S. stock market continued its upward trajectory in July.  Earnings season has been largely positive, although companies that announced disappointing earnings were often sold severely.  Bond yields fell somewhat in July, as some are concerned the stock market rally has gotten ahead of economic fundamentals. Here are the numbers:

 

S&P 500 Total Return MSCI EAFE BarclaysAggregateBond Adjusted CPI
July 2.06% 2.88% 0.43% 0.1%
June 0.62% -0.18% -0.10% 0.0%
YTD 2017 11.59% 17.09% 2.71% 0.6%

 

Commodities & Currencies

 

Oil prices rebounded almost 9% in July, although they are still down almost 7% for the year.  Political uncertainty in Venezuela and sanctions against Qatar likely had some impact.  Gold drifted slightly higher, and is up about 10% for the year.

The U.S. dollar extended its losses in July, and is down over 9% for the year against a trade-weighted basket of currencies.  Many market prognosticators had anticipated a year of dollar strength on the back of interest rate increases, so the reversal in dollar fortunes has caught some off-guard.

 

Economy

 

The ISM Manufacturing PMI in July came in at 56.3%, the 98th straight month of economic expansion.  The non-manufacturing, or services, index came in at 53.9%, also showing continued expansion.  Both readings, however, are weaker than the preceding month.  The Commerce Department released its final estimate of first quarter growth, with a slightly reduced reading of 1.2% growth.  The advance estimate of growth for the second quarter of 2017 was 2.6%.

 

The National Association of Realtors reports that existing-home sales in June 2017 were 0.7% higher than in June 2016.  In addition, the median price increased 6.5% to $263,800 from a year earlier.  Median home prices have now been rising for the past 64 months.  Distressed sales (foreclosures and short-sales) were just 4% of total sales in June, down from 6% a year ago.

Commentary

In 1986, a professor at Purdue University placed a group of study subjects at a variety of tables in a restaurant.  Some of the tables had Visa/MasterCard logos.  Some did not.  The subjects at the logo tables were found to leave larger tips than those at the other tables.  In 2001, another study reinforced this idea of a ‘credit card premium.’  Basically, the same person, in the same situation, will spend more money if they are paying with a credit card than if they are paying with cash.  It might not seem like a big deal to spend $15 for lunch if you have a credit card with a several-thousand dollar limit, but if you only have $20 in your pocket, and you were still hoping to grab some toiletries on the way home, you might find a way to eat for less.

 

Study after study has reinforced this effect.  A Twin Cities author and financial educator, Ruth Hayden, advocates that people put away the credit card as much as possible, and instead fill a group of envelopes with cash at the beginning of each month.  $500 for groceries, $200 for dining out, $100 for household needs, etc.  This forward-looking budget has the ability to help you make positive changes, rather than the rear-looking budget that many people use, where you track spending that has already happened.  With the envelope system, you might still carry a credit card for buying gas, and for the occasional online purchase, but the idea is that you can take control of your spending, rather than letting your spending control you.

 

In the world of financial advising, almost none of my clients fit into the profile of ‘spenders’ or ‘savers.’  I would categorize someone with a true spending problem as someone who has taken bankruptcy once or twice, or has severe credit card debt that they are unable to repay.  I would categorize a pure ‘saver’ as something of a financial purist, eating cold oatmeal for dinner to save money on both the energy bill and the grocery bill.  Most people are more complex.  Many people I have talked with have saved significant amounts for retirement, so they are ‘savers,’ and yet they also would readily admit to some spending problems in one or more areas of their life.

 

I would invite you to read the article ‘Always Leave Home Without It,’ which suggests that the ‘penalty’ we pay for using credit cards instead of cash can be up to 100%.  So if you are someone who wonders where all the money went at the end of the month, and feel like your inner ‘saver’ is unfairly stymied, try using cash for 30-days.  And let me know how it goes!

 

Please feel free to forward this to friends and family.

 

Sincerely,

Greg

 

 

This material was prepared by Greg Naylor, and all views within are expressly his.  This information should not be construed as investment, tax or legal advice and may not be relied upon for the purpose of avoiding any Federal tax liability.  This is not a solicitation or recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such.  The S&P500, MSCI EAFE and Barclays Aggregate Bond Index are indexes.  It is not possible to invest directly in an index.  The information is based on sources believed to be reliable, but its accuracy is not guaranteed.

 

Investing involves risks and investors may incur a profit or a loss.  Past performance is not an indication of future results.  There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Listed entities are not affiliated.

 

 

Data Sources:

www.standardandpoors.com – S&P 500 information

www.msci.com – MSCI EAFE information

www.barcap.com – Barclays Aggregate Bond information

www.bloomberg.com – U.S. Dollar & commodities performance

www.realtor.org – Housing market data

www.bea.gov – GDP numbers

www.bls.gov – CPI and unemployment numbers

www.commerce.gov – Consumer spending data

www.napm.org – PMI numbers

www.bigcharts.com – NYMEX crude prices, gold and other commodities

https://www.nytimes.com/2016/03/27/your-money/credit-cards-encourages-extra-spending-as-the-cash-habit-fades-away.html – credit card

https://www.psychologytoday.com/blog/the-science-behind-behavior/201607/does-it-matter-whether-you-pay-cash-or-credit-card – credit card

http://web.mit.edu/simester/Public/Papers/Alwaysleavehome.pdf – credit card

 

 

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