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Posted on SEP 7, 2017

Johnson Bank Wealth Weekly Investment Commentary | Thursday, September 7

This is part of an ongoing series of Weekly Commentary articles published by Johnson Financial Group.
This week's issue is written by Brian Andrew, SVP, Chief Investment Officer.

Power of Love

A colleague recently shared a bumper sticker with me that said, “There will be peace when the power of love overcomes the love of power.” With the recent Hurricane Harvey tragedy affecting the Gulf Coast and the threat of Hurricane Irma pending, we have seen many examples of how our citizens unite in times of crisis. Let's hope that continues as Irma makes landfall.

In addition to last week's news from Houston, we were inundated with economic data. This data represents the fundamentals we often talk about and provides a picture of how the economy is doing now and may do in the future. Let's review some of the highlights from last week's reports.


Last week we received a picture of how the consumer is feeling and doing with reports on confidence, personal income and spending. Based on the success of J.J. Watt's fundraising campaign (now over $20 million in relief aid for Houstonians), consumers are feeling generous, which is perhaps a reflection of their confidence in the job market.

Friday's consumer sentiment survey showed an uptick from 93 to 96.8. The rise suggests that consumers are feeling better about their income, job prospects and the future. In fact, the expectations portion of the survey rose the most, from 80.5 to 87.7.

On Thursday, we received a report on personal income growth. It was noted that incomes grew at .4% over the prior month while personal spending grew at .3%. This shows a slight increase in the savings rate as well, suggesting that while confidence is improving, consumers are still cautiously optimistic. With this release on spending and income growth we also received an update on the Federal Reserve's favorite measure of inflation (recall that the Fed is targeting 2%). The personal consumption expenditures deflator was up 1.4% and the core rate (excluding the more volatile food and energy components) was also up 1.4% year-over-year.

This rate of inflation has been declining since the beginning of the year, moving in the opposite direction than the Fed would like. This caused one of the Fed's board members to note, “I am concerned that the recent low readings for inflation may be driven by depressed underlying inflation, which would imply a more persistent shortfall in inflation from our objective.” That's Fed governor speak for, “The core rate of inflation is stubbornly low and we shouldn't expect it to move toward our target.”

This is one of the reasons we continue to be less concerned about a significant move higher in interest rates. While the Fed governor quoted here is one of the more sanguine about hiking interest rates, her postulation rings true and may explain why the market believes there is now only a 30% chance of another hike in December.

A graph showing the consumer sentiment level as released, with no revisions done to the content.

Oil & Gas

Last week we received a report from the Energy Institute of America (EIA) on the inventory levels for oil and gasoline in the U.S. While expectations were for a more significant drawdown in inventories due to Harvey, the change wasn't that significant. More importantly, as Hurricane Irma bears down on Florida, it is comforting to know that the U.S. inventory of crude oil stands at 458 million barrels. We use approximately 21 million barrels per day. Gasoline inventories stood at 229 million barrels. We use about 9.7 million barrels per day. Interestingly, production seemed to be little affected, as the Baker-Hughes rig count showed that the number of producing wells went up, nationally, from 940 to 943 while the number in the Gulf went down only one, from 17 to 16.

Oil prices are on the rise as the unknown effects of Hurricane Irma put some pressure on the supply chain. However, prices are up only modestly.

Corporate Profits

A summary of U.S. corporate profits was also released. During the second quarter, profits were up 8.1% to $1.785 trillion on an annualized basis. This was a decline from the first quarter growth rate of 11.5% but still well above the long-term average. It seems that profitability has been positively affected by the increase in economic activity.

The activity level was revised for the second quarter last week. The U.S. economic growth rate during the second quarter was revised upward to show 3% growth, up from the last update which was only 2.6%. The most inspiring part of the report was consumption, which showed a higher growth rate of 3.3% versus the previously reported 2.8%. The consumer and business investment were bright spots in this report. While estimates for third quarter growth are also near 3%, we would be surprised if we reach a growth rate for all of 2017 that high. Still, we'll take the higher profitability growth rate for U.S. companies. They should see continued strength during the third quarter as well, and that supports the current level of stock prices. Any substantial decline toward a more modest profit growth rate might spell trouble for the well-priced equity market.

Overall, the fundamentals for the economy, reported last week, were favorable. Because stock markets are already priced for that kind of growth, though, we don't expect a significant move higher off of these kind of numbers. Rather, they support the levels we've already achieved.

While the hurricane season is causing investors some concern, it brings out the best in people, and that's more heartening than the sound fundamental data we saw last week.

Brian Andrew
As Chief Investment Officer, Brian Andrew leads Johnson Financial Group's investment strategy
to provide consistent, actionable investment solutions for our clients.

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