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Weekly Review - December 12, 2016

Weekly Review - December 12, 2016

Guest Post - Monday, December 12, 2016

Summary

In a light week for economic data, the ISM non-manufacturing index ticked higher into very strong territory, while JOLTs and jobless claims showed continued strength.

Equity markets gained again as post-election sentiment and hopes for higher growth continued to drive returns. Bonds were mixed as treasury interest rates ticked upward, penalizing long debt and rewarding corporate credit particularly in high yield and bank loans. Commodities gained slightly with mixed results in a variety of assets, including oil.

Economic Notes

(+) The non-manufacturing ISM index for November rose by +2.4 points to 57.2, which exceeded the 55.5 consensus estimate. This was a strong showing for service industries, with positive numbers in business activity and employment, while new orders ticked down a bit, but all major subcategories remained well into expansionary territory—anything in the mid-50's or better is considered quite robust.

(-) The October trade balance moved further into deficit, at -$42.6 bil., which was a bit wider than the expected -$42.0 bil. Real exports in goods fell by almost -3% for the month, mostly in the food/agriculture area, due to what appeared to be the reversal of high soybean exports, which were a reason behind a strong Q3 GDP report. Real goods imports rose just over a percent, in both consumer and business items.

(+) Factory orders for October grew +2.7%, surpassing expectations by a tenth of a percent. Durable goods orders rose by +4.6%, which was revised down from the initial report, as were core capital goods orders and shipments.

(+) The preliminary Univ. of Michigan consumer sentiment survey for December came in at 98.0, which outperformed expectations calling for 94.5. Assessments of current conditions and expectations for the future both rose by 4-5 points. Inflation expectations ticked downward by a tenth of a percent to 2.5%, contrary to media reports of rising inflation fears. This survey number is actually just short of a post-recession high from early 2015, which is a potentially positive sign for areas such as consumer spending.

(0) Final nonfarm productivity for the 3rd quarter was unrevised at 3.1%. Unit labor costs, however, were revised up significantly for Q2, as well as +0.3% to 0.7% for Q3, which took the year-over-year growth up to +3.0%. This revision upward was fairly significant.

(+) The government JOLTs data for October came fell by almost -100k to 5,534k, but still remaining high and surpassing the expected 5,500k. The hiring rate was unchanged at 3.5%, as was the quit rate at 2.1% and layoff rate at 1.0%. While the stats were little changed, this labor indicator continues to demonstrate strength.

(+) Initial jobless claims for the Dec. 3 ending week fell by -10k to 258k, which was just a touch above the expected 255k level. Continuing claims for the Nov. 26 week came in below expectations of 2,048k at 2,005k. There appeared to be no major factors aside from the fact that these figures can be a bit off due to seasonal activity this time of year. Regardless, levels remain very low, a strong labor sign.

Market Notes

Period ending 12/9/2016

1 Week (%)

YTD (%)

DJIA

3.13

16.43

 

S&P 500

3.13

12.87

Russell 2000

5.64

23.91

MSCI-EAFE

2.91

0.57

MSCI-EM

2.90

10.54

BarCap U.S. Aggregate

-0.26

2.14

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2015

0.16

1.06

1.76

2.27

3.01

12/2/2016

0.49

1.11

1.84

2.40

3.08

10/21/2016

0.54

1.15

1.89

2.47

3.16

U.S. stocks continue to plug away higher to record highs in several cases, due to positive post-election sentiment and perhaps a seasonal 'Santa Claus' effect in the background—as this time of year has been historically very productive for equity investors. There also appeared to be some short-covering activity occurring, which refers to investors short the market taking on increasingly severe losses and being forced to buy stocks to close out these positions. From a sector standpoint, financials and tech led the way, while healthcare (predominantly biotech) lagged due to Trump comments about high drug prices, although the chances for action in this area appear less likely than they would have been under Clinton.

Foreign stocks actually outperformed U.S. stocks during the week, but a stronger dollar tempered the results somewhat. European results led from a regional standpoint, but Japan, the U.K. and emerging markets also logged sizable gains. The Japanese central bank met during the week, and made no changes in policy—GDP for Q3 in Japan was downgraded by almost a percent to +1.3% in the second release, which continues the problem of slow growth. The ECB met later in the week and decided to maintain their current quantitative easing program, albeit at a slower pace starting next spring, which offered markets hope of some underlying economic improvement in Europe. One problem with their QE program, in which they were buying all types of bonds in an attempt to lower interest rates (by raising bond prices through their demand), is that there simply weren't enough bonds to buy. There was also discussion of efforts to rescue the problematic Italian banking sector, which lifted sentiment as well.

U.S. bonds experienced mixed results as interest rates continued to tick higher. Long-term treasuries, as expected, were the worst performers, while investment-grade credit losses ended being less severe and high yield corporate and floating rate bank loans gained positive ground. Foreign developed market bonds were affected similarly in local currency terms, but losses were made worse due to a stronger dollar for the week. Emerging market debt, however, experienced strong gains.

Real estate experienced a strong week, led by gains of close to +4% in the U.S.—with the largest gains in cyclical lodging/resorts, but all sectors experienced strong showings. Despite higher interest rates, and weak returns for the past several months, the reason for the higher rates has historically been more important. Post-election optimism has boosted real estate returns along with equities, on hopes of stronger economic growth, lower taxes and a looser regulatory environment.

Commodities inched slightly higher for the week. Despite some downward volatility of a few dollar per barrel during the week, crude oil ended up not far from where it started at $51.50. Industrial metals gained over a percent, as did agriculture, while precious metals declined a percent as investors sought out risk rather than tried to avoid it.

Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger's, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder's, Standard & Poor's, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.

Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.

Additional Reading

Read the previous Weekly Review for December 5, 2016.

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