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Weekly Review - November 14, 2016

Weekly Review - November 14, 2016

Guest Post - Monday, November 14, 2016

Summary

In a relatively light week for economic data, the political surprise was obviously the outcome of the U.S. Presidential election. Otherwise, labor data was decent, while bank lending standards were little changed.

Equity markets moved sharply higher, before and somewhat after, election results came in. Foreign stock results were also positive in local terms, but were reduced by the impact of a stronger dollar. Bonds suffered with upward movements in interest rates across the yield curve. Commodities declined, with oil prices falling upon supply concerns and gold losing ground due to higher interest rates.

Economic Notes

(-) Wholesale inventories were revised down to a gain of +0.1% in September, which was half the +0.2% increase expected. This implies that there is a bit of reshuffling of inventories from Q3 to Q4, which may reduce GDP for the latter and enhance it for the latter. The ratio of inventory-to-sales came in at 1.33, which is down a bit from recent peak levels of 1.37.

(+) The preliminary November Univ. of Michigan consumer sentiment survey bounced higher, to 91.6, beating forecasts calling for 87.9. Assessments of current conditions rose a few points, while future expectations rose even higher, by over +5 points. Interestingly, the data was collected by election day, but before results were known, which may have played a role in the results. Forward-looking expectations for inflation over the next 5-10 years ticked higher from an all-time low level of 2.4% in October to 2.7%.

(0) The Fed's Senior Loan Officer Survey for the fourth quarter didn't show much change in standards for commercial and industrial lending, commercial real estate tightened a bit, while those for residential loans eased by a degree. Loan demand fell off a bit on the commercial/industrial side for companies of all sizes, while demand for residential loans picked up. For the latter, most categories of mortgages picked up except for government and sub-prime. The willingness of banks to make consumer installment loans also increased by a fair percentage.

(0) The government JOLTs report for September showed openings edging higher to 5,486k, but still fell below the 5,488k expected. This level is a bit below the peaks seen during the recovery, but similar to levels of a year ago. The openings rate rose to 3.7%, while the layoff/discharge rate ticked down to 1.0%, which happened to be an all-time low for the relatively short series. The quits rate was flat at 2.1%, while the hiring rate ticked down to 3.5%. This report is consistent with decent labor growth seen in other reports.

(0) Initial jobless claims for the Nov. 5 ending week fell to 254k, which fell below the 260k level forecast. Continuing claims for the Oct. 29 week ticked upward to 2,041k, which was slightly above expectations calling for 2,025k. It appeared that the decline was still focused on MO and KY, which experienced temporary auto plant closures. However, levels overall remain quite low otherwise.


Read the "Question of the Week" for November 14, 2016:

What does a Trump Presidency mean for investment markets?


Market Notes

Period ending 11/11/2016

1 Week (%)

YTD (%)

DJIA

5.52

10.70

 

S&P 500

3.87

7.90

Russell 2000

10.27

14.34

MSCI-EAFE

0.10

-1.81

MSCI-EM

-3.53

6.92

BarCap U.S. Aggregate

-1.37

3.60

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

11/4/2016

0.38

0.80

1.24

1.79

2.56

11/11/2016

0.48

0.92

1.56

2.15

2.94

Obviously, financial results took a back seat to the Presidential election, which (ironically, in hindsight) featured a strong run-up on Monday and Tuesday in anticipation of a Clinton victory, followed by a quick overnight plunge but far better results Wednesday as markets digested the implications of a President Trump. By sector, financials gained over +10% on the week due to higher interest rates as well as election results raising the probability of financial regulations such as Dodd-Frank and the new DOL rules (detailed above) being pared back or repealed altogether. Industrials also experienced a solid week, with hopes for infrastructure spending, while healthcare received a boost from the removal of the 'Hillary' effect—as one of her key areas of focus was high drug prices. Naturally, with higher rates, utilities ended up as one of the big losers on the week, followed by consumer staples in the defensive group.

Foreign markets experienced net gains as well in local terms, with results in Japan and Europe positive, while the U.S. dollar index gaining about +2%, which was helped by higher interest rates, acted as a one-week headwind to foreign returns when translated back. Emerging markets fared worse, particularly in Latin America, due to uncertainties about upcoming foreign policy and global trade decisions.

U.S. bonds suffered through a difficult week, as interest rates ticked higher. Aside from inflation firming a bit as the oil price declines of the prior two years have begun to 'roll off', the potential for fiscal spending on infrastructure and other programs by Trump have raised concerns over debt levels and further inflationary pressures. To no surprise, long Treasuries experienced the most severe sell-off (-5% for the 20+ year plus group), while intermediate-duration bonds were far less affected. High yield corporate bonds were down just minimally, while bank loans gained slightly, which helped in portfolios.

Foreign bonds were similarly affected, with rates rising abroad as well, but a higher dollar translated these small losses into far larger ones. Emerging market local debt was the most affected, due to the dollar as well as Trump protectionist fears, which, if realized, would dampen global trade and likely wreck the most havoc on emerging market nations (Mexico, of course, being the prime example).

Real estate was mixed to slightly lower, depending on the index, which fell somewhat between the strong results of equity markets and expected poor returns that generally fall out of interest rates moving higher. Economically sensitive areas such as lodging experienced strong gains, in line with other equities, while residential and healthcare REITs lagged (the latter due to changes in government healthcare legislation that could be coming, which raises uncertainty). Due to the negative dollar effect, Asian and European real estate markets sharply underperformed those in the U.S., with losses upwards of -5%.

Commodities fell over a percent on net with mixed sector results and stronger dollar. Precious metals were a big loser on the week, with gold down over -5%, as higher interest rates boosted real rates, which is arguably one of the biggest gold price drivers. Industrial metals prices, however, rose +5%, offsetting this effect, led by large jumps in copper and nickel, partially on the hopes for a large Trump infrastructure spending plan. Despite some moves above $45 mid-week, crude oil ticked down from $44 down to $43.40 as supply concerns and lack of production cuts dominated market sentiment.

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 November 7, 2016.

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