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Weekly Review - December 28, 2015

Weekly Review - December 28, 2015

Guest Post - Monday, December 28, 2015

Summary

  • For a short Holiday week, quite a few economic data points were released, including flattish durable goods orders, mixed housing results but improved consumer sentiment.
  • Equity markets rallied during the week, with help from some improvement in energy prices. Domestic bonds were down on interest rates ticking upward a bit, while commodity prices benefited from oil inventory news and weakness in the dollar.

Economic Notes

(0) Durable goods orders for November came in flat on a headline level, which was slightly better than the forecasted -0.6% decline. However, removing the more volatile components, core orders fell -0.4% on the month, which was worse than the -0.2% decline expected—the bulk of the drop originating from electrical equipment, machinery and primary metals. Core capital goods shipments also fell -0.5%, contrary to a gain of +0.5% expected.

(0) Personal income for November rose +0.3%, a tenth better than expected and led by gains in wages/salaries, while spending also gained +0.3%, as expected. The PCE price index came in flat on a headline level for the month and just up a tenth for the core. Year-over-year, headline and core rose +0.4% and +1.3% respectively, showing continued very tempered price increases.

(0) The FHFA house price index rose +0.5% for October, which was on target with expectations. The bulk of regions experienced home price increases, with the Kentucky-through-Alabama region gaining over a percent, while the South Atlantic segment was close behind; by contrast, New England and NY/NJ/PA fell back by a few tenths. Over the full year, the national index rose by +6%, indicating solid price growth.

(-) Existing home sales in November fell by -10.5% to 4.75 mil., which sharply underperformed the expected meager -0.2% decline. Single-family homes were largely responsible, with a decline of -12%, as multi-family sales rose by nearly +2%. Regionally, the Midwest and West lost ground on the order of -15% roughly. Interestingly, though, the reason for the sharp decline appeared to be heavily due to a new federal government rule regarding closing documents, per the National Association of Realtors, so Nov. may be meaningless in the whole scheme of things.

(+) New home sales, by contrast, rose +4.3% to 490k, which beat expectations of a +2.0% gain, although negative revisions affected prior months to some extent. Sales fell in the Northeast and Midwest U.S., but rose in the West and South. These are below peak levels seen this year, but remain decent. It's important to note that this could be the best year for sales since 2007, although we still not building nearly enough homes to satisfy long-term demographic demand.

(+) The final December Univ. of Michigan consumer sentiment number came in better than expected, rising almost a point to 92.6, surpassing a forecasted 92.0 reading. Consumer assessments of current conditions as well as future expectations both improved. Inflation expectations for the coming 5-10 years remained steady at 2.6%.

(0) The final estimate of 3rd quarter GDP was taken down a tenth from +2.1% to +2.0%, but was still better than the +1.9% expected. The bulk of the difference was due to lower inventory accumulation and a widening in the trade deficit (the adjustments may be a small boost to 4th quarter GDP). Other segments, such as personal consumption, were little changed from previous estimates.

(0) Initial jobless claims for the Dec. 19 ending week fell to 267k, which was a bit below the expected 270k. Continuing claims for the Dec. 12 week also fell, by -47k, to 2,195k, which was slightly below the 2,200k expected.


Read the "Question for the Week" for December 28, 2015:

2016 (Part 2): How is the investment environment shaping up?


Market Notes

Period ending 12/24/2015

1 Week (%)

YTD (%)

DJIA

2.47

0.94

S&P 500

2.80

2.20

Russell 2000

3.03

-2.89

MSCI-EAFE

2.05

-0.55

MSCI-EM

1.82

-15.92

BarCap U.S. Aggregate

-0.23

0.58

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2014

0.04

0.67

1.65

2.17

2.75

12/18/2015

0.19

0.97

1.67

2.19

2.90

12/24/2015

0.20

1.03

1.73

2.25

2.96

The 'Santa Claus' rally did finally arrive, with a solid week in equities generally upon generally low volume. From a sector view, energy and materials led with some firming in commodity prices, while consumer discretionary trailed the pack with much smaller gains.

Foreign stocks also gained, to a lesser extent than U.S. equities, with stronger returns in USD terms with a generally weaker dollar on the week (mostly due to a stronger euro). Commodity-sensitive nations made the most headway in both developed and emerging markets, while Japanese and Brazilian equities lagged with negative returns. Japanese performance was related to mixed government projections for growth and inflation, while the replacement of Brazil's finance chief added to a flurry of uncertainty for that region, as did a weak quarterly economic government economic report. Spanish returns recovered somewhat after early weakness following an inconclusive election in which the prime minister was reelected but conservative party lost ground in Parliament.

U.S. bonds were generally weaker, with interest rates moving higher in the belly of the yield curve by about 10 b.p. High yield bonds were among the week's winners, unsurprisingly, due to the rebound in the energy/materials segment which has driven sentiment in the group all year. Foreign bonds lost ground overall in local terms but gained when translated back to USD as the dollar weakened during the short week, with Australia and Japan leading, and Europe lagging.

Real estate gained in line with equities, led by more cyclically-sensitive areas such as lodging/resorts, as would be expected in such a week, although other domestic areas such as retail and residential also gained ground. European and Asian REITs ended up with positive returns, but to a much lesser extent.

Commodities again were in the news as a government report showed higher drawdowns of crude oil and deeper declines in rig counts than expected, driving prices several percent higher and bucking a weak trend. Crude oil gained a solid +5% on the news, moving back from near-$35 levels representing 11-year lows to just above $38. Natural gas prices also spiked over +10% with expectations of a return to colder conditions on the East Coast sooner than later. Other commodity groups generally gained a few percent on average, in keeping with energy price sentiment and a weaker U.S. dollar.

Have a good week and Happy New Year.

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 21th, 2015.

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