QInsight Group





 

Weekly Advisory –September 26, 2016

Index

Closing Level

Week Return

Year-to-date Return

Dow Jones Industrials

18261.45

+0.76%

+4.83%

Nasdaq Composite

5305.75

+1.17%

+5.96%

S&P 500 Composite

2164.69

+1.19%

+5.91%

Russell 2000

1254.62

+2.44%

+10.45%

Yield on 10 Year US Treasury Note

1.62%

 

 

 

 

 

 

The Economy:

Federal Reserve officials and home builders agree that the U.S. economy is strengthening.  The Federal Reserve’s press release issued this week stated that the case for higher interest rates had “strengthened”, but most policy committee members decided not to raise interest rates at this time to give discouraged workers more time to get back into the labor force.  In other words, the Fed wanted to wait for less slack in the labor market.  The National Association of Homebuilders’ confidence index rose six points to 65 in September, the second highest level for this confidence index since prior to the 2007 financial crisis.

The actual economic data seemed to point in a different direction.  Housing starts fell 5.8% in August and newly issued building permits were flat for the month but still 23% below August 2015.  Housing analysts say that floods in Louisiana may have temporarily depressed housing starts.   Existing home sales fell 0.9% in August – the second straight monthly decline in existing home sales.  The median home price rose 5.1% in the past 12 months and analysts are concerned that high prices are starting to crimp sales.  The Markit flash purchasing managers index fell slightly in September to 51.4% from 52.0% in August.  However, this index is at its lowest level in three months.  The Conference Board’s index of leading indicators fell 0.2% in August, and the National Activity Index (prepared by the Chicago Federal Reserve) fell from -0.24 in July to -0.55 in August.  This means the U.S. economy is still growing below its long-term average.   

 Markets:

The S&P 500 stock index rose 1.19% during the week, and this index is up 5.91% so far in 2016.  The combination of slow and low growth in the U.S. economy and the announcement by the Federal Reserve that it would delay any short-term interest rate increase was considered bullish by stock investors.

The leading sectors for 2016 are the Utilities, Telecommunications and Technology sectors (+18.0%, +15.7% and +10.5%, respectively). 

Since the QInsight Group defines the US economy to be in an EASEOFF period, investors may buy or hold stocks with the following characteristics: 

1.  The stocks should be in industry groups that have historically outperformed in the Easeoff phases of the business cycle (see www.qinsight.com/current.htm for a list of these industry groups). 

2.  The industry groups should show rising relative strength (on a 52-week basis) as compared to the S&P 500 index. 

3.  The stocks should have excellent “valuation” characteristics (as measured by a price-to-earnings ratio, price-to-sales ratio or price-to-cashflow ratio well below the industry average) to avoid stocks that may have become overvalued.