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Weekly Review - January 18, 2016

Weekly Review - January 18, 2016

Guest Post - Monday, January 18, 2016


  • Economic data on the week was largely disappointing, with retail sales and manufacturing figures falling below expectations—manufacturing results continuing a trend downward. However, employment measures as well as business/consumer sentiment both improved.
  • For the second straight week, markets suffered as investors worried about China and oil, causing a negative response for global equities. Bonds gained in risk-off fashion as long-term interest rates fell again to levels not seen in a while. Crude oil again hit and fell below $30 as oversupply concerns dominated market sentiment.For the second straight week, markets suffered as investors worried about China and oil, causing a negative response for global equities. Bonds gained in risk-off fashion as long-term interest rates fell again to levels not seen in a while. Crude oil again hit and fell below $30 as oversupply concerns dominated market sentiment.

Economic Notes

(-) Retail sales fell -0.1% in December, which was on target with expectations. Removing the more volatile categories, however, core retail sales fell -0.3%, which was more of a disappointment compared to an expected gain of +0.3%. Declines occurred in a variety of areas, including clothing and general merchandise/misc. items; however, non-store retail sales (much of which is online activity) rose by +0.3%.

(-) The January New York Empire manufacturing survey fell sharply to -19.4, its lowest level since 2009, and a sharp disappointment compared to the -4.0 reading expected. Underlying components were also weak, with negative results in general business conditions, new orders and shipments; on the positive side, employment and the average workweek rose (the latter rose dramatically), which was in sharp contrast to weakening conditions in other areas.

(-) Industrial production fell -0.4% for December, which was a bit weaker than the -0.2% decline anticipated, as output in vehicles, utilities and mining declined. Additionally, Nov. production was revised lower by several tenths of a percent as well. Energy no doubt has played a role here, as had weakness in prices for other commodities, while utilities have suffered with a warmer-than-normal period in the northern part of the country. Capacity utilization fell to its lowest level in over two years, to 76.5%, down from 76.8% expected.

(0) The Producer Price Index fell on a headline level by -0.3%, which was in line with expectations and led by cheaper energy prices. Core PPI, which excludes energy and food, was flat, with offsetting gains from health care services, which has shown some pressures higher in other inflation surveys as well. Year-over-year, PPI is up +0.9%, which is quite low from an inflation measurement standpoint. Energy price declines are obviously a large factor, but other segments are similarly tempered. In a separate report, import prices fell -1.2% for December, a tenth less than forecast, and were also led by the -10% decline in petroleum, as well as other industrial supplies.

(+) In a rare bright spot for the week, the preliminary Univ. of Michigan consumer sentiment index for January rose by +0.7 points to 93.3, which surpassed expectations of a smaller rise to 92.9. Consumer expectations for the future rose by +3 points, while assessments of current conditions fell by -3. Inflation expectations for the next year fell by a few tenths to 2.4% (possibly gasoline-related), while those for the next 5-10 years ticked up a tenth to 2.7%—the multi-year estimate is well within range of history.

(+/0) The NFIB small business optimism index for December ticked up by almost a half-point to 95.2, although it remains below cycle highs from late 2014 and well below the average of 98 from over the last 40 years. Under the hood, the net percentage of firms planning to raise worker comp remained at 20%, which is considered high (actually, best in 10 years). Areas of strength, though, included more current job openings, plans to increase employment and plans to make capital outlays (which have been lacking across of variety of business sizes during the recovery). However, net respondents expect earnings and the overall economy to decline, which runs counter to some of the areas of optimism, naturally.

(0) JOLTs job openings for November rose to 5,431k, an improvement of +1.5% from the prior month, but short of the 5,450k expected. Areas of strength included professional/business services as well as construction; lower levels of openings were seen in manufacturing/trade, transportation and utilities. This mirrors patterns in other labor market measures. The quit rate was unchanged at 2.0%, after being revised upward last month. The hiring rate was also flat at 3.6%, which has been its level for all but one of the last 10 months.

(-) Initial jobless claims for the Jan. 9 ending week rose to 284k, which surpassed expectations calling for 275k. Continuing claims for the Jan. 2 week came in at 2,263k, which was also higher than the 2,210k expected. While a disappointment, it's important to note that the first two weeks in January contain significant seasonal adjustment biases, perhaps the largest of the year, which could have affected results.

(0) The Fed Beige Book, which outlines regional economic conditions across the U.S. several times a year, reported ongoing 'modest' to 'moderate' growth activity across the bulk of districts, in keeping with recent releases. Exceptions were New York and Kansas City where growth was flattish, while conditions were more upbeat in Boston. While consumer spending showed moderate expansion, as did both residential and non-residential building activity, manufacturing was mixed and affected negatively by a strong dollar. A key theme mentioned was that U.S. wages have been 'subdued'—an item that has been closely watched due to the impact on (desired) inflation. While there were some pressures in skilled positions in certain industries, as has been described in other reports, a bit also appeared due to minimum wage increases and higher turnover in lower-level positions. Wage growth continues to be a mixed bag.

Market Notes

Period ending 1/15/2015

1 Week (%)

YTD (%)




S&P 500



Russell 2000









BarCap U.S. Aggregate



U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.



















After hopes that the poor first week of the year would reverse, last week was no better. After being the worst start to a year in recent memory if not history, stocks slid again. The blame was again focused on China growth uncertainties as well as the odd path of crude oil. There is also a backdrop of uncertain Fed action in the coming year, as well as recently weaker manufacturing data, which points to a mid-cycle slowdown, which investors are hoping does not deteriorate into something worse.

U.S. stocks were down across the board, with the smallest losses in defensive utilities, telecom and staples, while materials and financials suffered the most. Financials are caught up in negatively like this since higher interest rates (assuming a stronger economy) can benefit the group; however, weakness lowers the likelihood and lengthens the perceived timeline of rate hikes. Higher-risk small-cap equities continued their trend of sharply underperforming larger cap stocks.

Based on estimates, S&P earnings are likely to come in mixed for the quarter and negative for 2015 as a whole. Per our prior discussions, the bulk of earnings decline in the broader index has come from energy and materials—while these are dramatic losses, energy now represents <7% of the S&P market cap, and materials <3%. Unsurprisingly, with a strong dollar as a headwind, firms with higher U.S. sales have outperformed those with higher foreign revenues, despite the long-term trends towards more of the latter. The more positive news is that the other eight sectors, representing 90% of the index's market cap are in much better shape, with expectations for quarterly earnings growth better for the quarter (perhaps even positive), and +7% for the full year, which is an acceptable result. If economic growth continues as this pace, expectations for next year are higher, and, if energy/materials prices were to firm up so that the terrible year-over-year comparisons fade away, those sectors could be additive to results. While everyone wants better (and positive) earnings numbers for the index, this is a glimmer of hope to counter some media negativity.

In foreign equity markets, results weren't any better—on par with U.S. stocks on a local basis and slightly worse when translated for a slightly stronger dollar on the week. A key European index fell into -20% bear market territory, as officially defined from highs reached in mid-2015 (when foreign stocks were far ahead of U.S. stocks). Some of the better performances originated from the non-BRIC areas of the emerging world, including Thailand, Indonesia and Mexico, with China and Russia faring the worst, along with Canada, with petroleum prices struggling to find a bottom.

Safe-haven U.S. government bonds rallied, with interest rates falling by about 0.10% across the intermediate to longer ends of the yield curve. Longer-duration sovereign debt in developed Europe, Japan and Australia also performed well in local terms. U.S. high yield indexes as well as both USD-denominated and local emerging market bonds lagged on the week, losing up to several percent.

Commodities down and in the news again, and again led by oil, which was down over -10%. Prices continued to fall around the $30 level, and then below, prior to a government announcement concerning Iranian sanctions being lifted, which would open even more spigots and add to the supply glut. As we've noted before, prices in any asset, especially volatile ones like commodities can have a tendency to overshoot. Is there exponentially more oil available than in June 2014 when pricing was just over $100 or last summer at $60? Likely not, but perceptions have changed. Timing is a wildcard as energy markets continue to look for support levels; eventually, selling exuberance ends and analysts reassess. At the same time, low energy costs are generally a good thing for most businesses and consumers.

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 January 11, 2016.

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