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Weekly Review - November 16, 2015

Weekly Review - November 16, 2015

Guest Post - Monday, November 16, 2015

Summary

  • In a light week for economic data, retail sales disappointed somewhat while consumer sentiment and jobs/claims data remained strong. Producer prices fell, especially on a year-to-year basis, which continues to reflect non-inflationary pressures throughout the system.
  • Equity markets fell back sharply on the week due to a number of economic and earnings-related factors. Bonds fared slightly positively in the risk-off environment, as interest rates generally fell, with foreign issues outperforming domestic. Crude oil prices declined dramatically, back towards $40/barrel upon ongoing supply concerns.

Economic Notes

(-) Retail sales for October rose +0.1%, which disappointed relative to an expected +0.3% gain; however, some results from September were revised upward. Taking the more useful core/control measure (which strips out more volatile items such as autos, gas and building materials), the gain improved to +0.2%, but remained only half of the gain expected.

(0) The producer price index fell in October by -0.4% on a headline basis and -0.3% on a core level, which was a bit surprising compared to consensus expectations of a slight gain of a tenth of a percent or two for either. Food prices falling -0.8% was a key catalyst in the headline number as energy prices were unusually flat on the month; in other areas, trade services prices declined -0.7% and a drop in light truck prices coinciding with new model rollouts also appeared to contribute. Year-over-year, headline PPI fell -1.6%, which is a record low for this modernized and preferred ‘final demand’ version of this series (which only began in 2009, however). Finished goods PPI, an older series, is down -4% year-over-year. As with other inflation metrics, this series has continued to show an extremely tempered trend—not the least of which is due to lower commodity prices such as energy, which are key inputs into manufacturing and transportation costs.

(+) Import prices fell -0.5% in October, which was more dramatic than the -0.1% decline expected. Removing fuels from the measure reduced the decline to -0.3%, as fuels played a role in the ‘industrial supplies and materials’ component falling -1.4%. Additionally, imported food/agricultural products fell by a percent. As discussed last week, a strong dollar has continued to keep imported inflation levels low, which is the one positive side effect.

(+) The preliminary Univ. of Michigan consumer sentiment survey came in better than expected, rising +3.1 points to 93.1 and besting expectations of 91.5. Consumer assessments of current conditions and future expectations both improved by several points, and were equally balanced. Inflation expectations for the coming 5-10 years were unchanged, holding at a near-record low point of 2.5%—so deflationary pressures elsewhere have affected consumer feelings as well, as they’re known to do if they persist long enough.

(0) Wholesale inventories rose +0.5% for September, which largely surpassed the +0.1% expected; earlier months were revised higher as well. As a component of this, business inventories gained +0.5%. While a relatively minor economic report at the surface, where this tends to matter is in GDP calculation and revisions—this could boost the next estimate of 3rd quarter economic growth up by a few additional tenths (while taking a bit of growth away from 4th quarter growth, on the downside).

(+) The JOLTs job openings report for September showed a sharp rebound from Aug. to 5,526k, which surpassed the 5,400k expected. Professional/business services showed the biggest gains, of +126k, as did retail trade (+64k), while accommodation/food services was among the weakest areas (losing -40k openings). The quit rate was flat at 1.9%, while the hiring rate fell by -0.1% to 3.5%. Strength here is similar to other labor data, and continues to put pressures on the FOMC from the employment mandate side.

(0) Initial jobless claims for the Nov. 7 ending week were unchanged at a level of 276k, which was slightly higher than the expected 270k. Continuing claims for the Oct. 31 week came in higher as well, to 2,174k, up +5k from the prior week and +19k over consensus. No special factors were noted and the series continues to run at very low levels.

Market Notes

Period ending 11/13/2015

1 Week (%)

YTD (%)

DJIA

-3.64

-1.16

S&P 500

-3.56

0.06

Russell 2000

-4.40

-3.75

MSCI-EAFE

-1.60

0.23

MSCI-EM

-3.68

-14.14

BarCap U.S. Aggregate

0.19

0.53

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

11/6/2015

0.08

0.90

1.73

2.34

3.09

11/13/2015

0.14

0.86

1.67

2.28

3.06

It was a sharply negative week for U.S. stocks, due to some weaker earnings results in certain key sectors (such as technology and consumer goods retailers later in the week), mixed economic data and more volatility in energy. This was all coupled with growing probabilities of a Fed rate increase in December, the fire for which was stoked by comments seemingly in favor of hikes by several FOMC members during the week during routine public appearances. From a sector standpoint, defensive utilities led the way with slight positive gains, while energy suffered the worst, along with major declines in crude. With equity ‘beta’ generally driving things, large caps held up better by a few percent than did smaller-caps, which have lagged on a year-to-date basis—coupled with higher valuations and more leverage generally, at least from an index basis. It’s important to remember that at least a quarter and up to a third of small-cap companies have no earnings, which can complicate analysis.

Market breadth, or lack thereof, has also been a point of discussion lately by some analysts. When looking at the S&P this year, five companies (specifically, Amazon, Alphabet-formerly-Google, Microsoft, Facebook and General Electric) have accounted for almost all of the year-to-date returns. Without these five, the market would be at a -2% loss. While there certainly has been a focus on a certain number of mega-caps, this group represents almost 10% of the index’s overall market cap, so they’re bound to have a significant effect. On the positive side, these periods of narrow breadth don’t last forever, and have historically not been especially meaningful of forward-looking market results, other than investors favoring companies that were of higher quality to a certain degree.

There was more differentiation in foreign stock returns last week, with Japan actually gaining a few percent, while Europe and the U.K. fell, although not to the same degree as the U.S. (The Paris terrorist attacks occurred after markets had closed.) European GDP for Q3 came in at +0.3%, the 10th consecutive quarter of expansion, despite not being at the pace desired. This is despite large emerging market index components China and Brazil experiencing surprisingly tempered losses. In China, what appeared to be some strength in the services sector was tempered by weaker results in the manufacturing segments (much like the scenario seen in the U.S.), coupled with weaker inflation under 1.5% and lower exports. The heavier drawdowns were focused again on commodity nations, such as Russia, South Africa and Norway, especially as oil prices plummeted. Greece was one of the worst-performing markets on the week, in keeping with recent protests.
U.S. bonds experienced positive results as ‘risk-off’ sentiment lowered interest rate across most of the curve (except for the T-bill end). As expected, long treasuries experienced the most benefit, while high yield and bank loan areas lost up to a percent or two. Foreign bonds in developed markets gained a bit with continued hopes for quantitative easing measures in coming month, which has a depressing effect on bond yields, while emerging markets were mixed with a risk-off tendency on the week.

Real estate generally experienced declines, in line with broader equities, but to a lessened degree. Foreign REITs generally outperformed domestic names, with hopes for additional stimulus forthcoming and implied pressures from higher U.S. rates. U.S. apartments/residential led with flattish results while retail/malls fell with associated earnings results from several key retailer names on the week.

Commodities fell backward again, with the energy sub-group falling by over -5% upon government reports of continued higher supplies—West Texas Intermediate Crude declined from the $44.50 level the prior week to just over $40 by Friday. Precious metals were the best-performing asset class with minimal losses and a little-changed dollar not having much impact. High oil supply levels continue to weigh on markets, as the shale riches promised several years ago have created more of a glut than anticipated; additionally, the prospect of increased exports from abroad (notably Iran) are outstanding. To make matters worse, slowed economic growth in China has sporadically weighed on the demand side. A question that surfaces again at this point is: ‘Where is the bottom for oil prices?’ Many experts are hesitant to provide guidance in this newer paradigm, but round numbers, such as $30 or $40 tend to be behaviorally meaningful support and resistance points in commodity markets. Further out, however, several commodity groups are pegging longer-term ‘stable’ levels in the $45-65 range, which is lower than the $70-80 fair value assumed to be a reasonable anchor not all that long ago, and these estimates continue to evolve (mostly downward). At the same time, these are lower oil and gas prices we’re talking about...why are we complaining?

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 2, 2015.

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