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Weekly Review - February 8, 2016

Weekly Review - February 8, 2016

Guest Post - Monday, February 08, 2016

Summary

  • Economic data was highlighted by better-than-expected results in manufacturing and weakness in services—both the opposite of recent trends. The Friday employment situation report was mixed, leaving investors wondering about possible effects on upcoming central bank policy.
  • Global equity markets fell on the week, with uncertainties about economic growth and volatile oil prices. Fixed income gained on the risk-off week, with lower interest rates. Foreign assets were affective positively, at least for U.S. investors, from the largest one-week decline in the dollar in several years.

Economic Notes

(0) The ISM manufacturing index for January rose to 48.2, just under the 48.4 reading expected, but remained just under the baseline of 50, which signifies growth. Production and new orders both rose (coming in over 50), inventory were unchanged and remained contractionary, while employment fell a few points into further negative territory.

(-) The ISM non-manufacturing index fell by just over -2 points for January, to 53.5, coming in short of expectations calling for a smaller decline to 55.1. This is the lowest level of the services index in two years, and was led by a drop in overall business activity, which fell over -5 points, and declines in new orders and employment. While the index remains above the critical 50 level.

(-) Construction spending rose +0.1% for December, underperforming the +0.6% gain expected. Private non-residential construction (manufacturing facilities, specifically) led to the bulk of the weakness. By contrast, private residential construction rose nearly +1% for the month (a positive +8% on a year-over-year basis).

(0) Personal income for December gained +0.2%, which was a tenth stronger than forecast; personal spending was flat, which was a tenth below expected. On the inflation side, the PCE price index fell -0.1% in December on a headline level and was flat on the core side (for 2015, year-over-year, PCE inflation experienced a +0.6% headline and +1.4% core gain).

(-/0) Factory orders for December fell by -2.9%, which was a tenth of a point below expectations. Core durable goods orders (which are non-defense excluding aircraft) had been revised upward, as were capital good shipments, which came in showing a gain of +0.2%. In keeping with the prior durable goods report, December appeared to be driven lower by an almost -80% decline for the month in mining/oil/gas machinery orders.

(+) The ADP employment report for January showed a gain of +205k jobs, which outperformed the expected +193k level; December results were also revised upward by +10k jobs. Gains appeared to be broad-based, with contributions from both goods and services production, including professional/business services, trade/transports/utilities, construction and financial activities.

(0) Initial jobless claims for the Jan. 30 ending week rose to 285k, which was +7k higher than consensus estimates. Continuing claims for the Jan. 23 week, on the other hand, fell to 2,255k, but remained higher than the 2,240k expected. No special factors appeared to color the reports for claims, which have ticked upward over the past quarter but continue to remain low by comparative standards.

(-/0) The employment situation report for January was a mixed bag, with some elements coming in weaker than expected, which fueled market fears of more sustained fundamental slowness; however, economists also viewed some decent spots in the data.

Nonfarm payrolls rose by 151k, with job gains in retail trade, food services (including bars), health care and manufacturing (the latter being quite strong, and in contrast to recent weak results in manufacturing indexes). Declines occurred in private education, transportation/warehousing and mining activities (which includes the energy patch). Some of the weakness may be some 'payback' elements from seasonal effects and warmer-than-average weather during prior months, which eventually tend to revert back down to the mean. Again, while the numbers were disappointing, it's important to remember the large amount of error (+/- 100k jobs) embedded into these reports, and potential for revision, so markets make much more of this data—on both the good and bad side—on a day-to-day basis than they probably should.

The unemployment rate ticked down a tenth to 4.9%, and the labor force participation rate (at 62.7%) ticked up a tenth from the prior month. U-6 measures of underemployment remained flat at 9.9%, as the number of 'marginally attached' job seekers increased.

The average workweek increased by +0.1 to 34.6 hours, and average hourly earnings rose +0.5%. Earnings rose +2.5% on a year-over-year basis, which is more on track with policymaker hopes for stronger results.

Earlier in the week, reported nonfarm productivity for the 4th quarter fell at a rate of -3.0%, which was a percent lower than the expected -2.0% and the slowest pace in over 5 years. Year-over-year in 2015, productivity rose at a rate of +0.3%, which is quite low by historical standards. Unit labor costs for Q4 rose +4.5%, which was two-tenths of a percent higher than expected, and a more moderate +2.8% over the past year.

Market Notes

Period ending 2/5/2015

1 Week (%)

YTD (%)

DJIA

-1.54

-6.85

S&P 500

-3.04

-7.85

Russell 2000

-4.78

-13.15

MSCI-EAFE

-1.52

-8.64

MSCI-EM

-0.37

-6.87

BarCap U.S. Aggregate

0.24

1.62

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

1/22/2016

0.33

0.76

1.33

1.94

2.75

2/5/2016

0.30

0.74

1.25

1.86

2.68

After a promising end to the previous week, stock prices declined again along with oil prices and a mixed employment report on Friday. Materials and utilities actually gained sharply, among sectors in the S&P, while consumer discretionary and information technology lost over -5%, demonstrating a wide band of market sentiment on the week. Small-cap stocks continued to suffer far worse than large caps, causing portfolio underweights here to continue to be effective in allocations.

The dollar experienced its worst week since 2009, falling almost -3%, as lackluster economic data hurt sentiment and lowered chances of near-term Fed rate hikes. As it stands, March had had been taken as a given, but probability of a move next month has now fallen dramatically.

This weakness naturally helped foreign stocks, which were led by emerging market names such as Indonesia, Brazil and China, while larger developed markets in local currency terms lagged dramatically, due to the weaker dollar, as well as from lackluster European earnings results and economic forecasts. Uncertainty also persists regarding the U.K.'s membership in the EU, and negotiations persist, led by the EU's desire to retain the nation under the broader union.

U.S. bonds experienced gains with movements away from risk assets, with lowered interest rates across the yield curve. As expected, longer duration debt, such as 10-20 year treasuries, experienced the strongest gains while investment-grade credit and other areas were generally flat, as wider credit spreads offset some of the duration movements. High yield indexes lost ground by over a percent. This is a bit of an overlooked issue, but there has been a sizable divergence (a few percentage points is big in fixed income terms) in active high yield management—as those with a higher-quality and/or more credit research-intensive bent have sharply outperformed broader indexes during this most recent energy- and materials-related credit cycle. This is one case where exchange-traded funds may offer cheap 'beta' exposures to certain asset classes, but you can pay a price elsewhere.

Real estate results were dependent on the sector and regional composition. With a weak dollar, foreign REITs led the way with sharp gains, notably in Japan, Europe and Canada, while U.S. real estate came in mixed. Healthcare came in with positive returns on the U.S. side, while recent winner apartments/residential trailed with losses. Year-to-date, real estate returns have been in the negative, but to a lesser degree than broader global equities.

Commodities continued to be a key area of focus, with the energy segment falling by -5%. Crude oil thrashed around the $30 area, ending at $31, a few dollars lower than last week. Continued rumors regarding production cutback deals between Russia and non-gulf nations dominated news, but the outcome was inconclusive. One of the larger asset 'winners' in 2016 so far has been gold, which gained nearly +4% last week and is up +9% year-to-date, with silver not far behind. The victim of very poor sentiment over the last several years, precious metals have benefitted from flows away from risk assets this year, coupled with low 'risk-free' interest rates from treasuries and lowered probabilities of Fed action in the near term, as well as fears of ultimate central bank impact on currency values in key developed markets. Without a cash flow to measure, gold, like other commodities, is difficult to place a 'bfair value' on, and opinions continue to span the gamut between extreme bull and bear.

Have a good week.

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 February 1, 2016.

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