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Weekly Review - November 28, 2016

Weekly Review - November 28, 2016

Guest Post - Monday, November 28, 2016

Summary

During a shortened Thanksgiving week, durable goods orders came in stronger than expected, which buoyed hopes for business capex spending. In real estate, home prices and existing home sales both showed continued growth.

Stock markets in the U.S. ended with positive returns again, with several all-time highs reached in a variety of both large- and small-cap indexes. Bonds were mixed as interest rates ticked upward a bit, but at a slower pace than prior weeks. Commodities were slightly higher as industrial metals experienced gains, but oil declined slightly.

Economic Notes

(+) Durable goods orders gained +4.8% in October, which outperformed the +1.7% increase expected by consensus. The commercial aircraft category was responsible for much of the increase, with 85 higher-end plane orders from Boeing, but as we know, this segment is quite volatile on a month-to-month basis. Auto orders declined -0.6%, however. Excluding the transportation components, orders gained +1.0% and core orders rose +0.4%, based on strength in electrical equipment and metals, which was a slight surprise on the upside. Core goods shipments rose +0.2%, which beat expectations by a tenth. Inventories of durable goods overall were little changed for the month. Monthly data here is sporadic, but better capex is what many economists have been looking for, so any positivity is welcomed.

(+) Existing home sales for October rose +2.0% to a seasonally-adjusted and annualized 5.6 mil. units, which surpassed expectations of a -0.6% decline and was interestingly the strongest report since early 2007. Single-family home sales rose just over +2% while condos/co-ops were flat.

(-) New home sales for October declined -1.9% to 563k, which disappointed relative to expectations calling for 590k seasonally-adjusted annualized units; in addition, a few prior months were revised down by a total of -19k. Regionally, sales fell most dramatically in the South and Midwest while the West experienced gains for the month. Months supply ticked up by a tenth to 4.4.

(0/+) The FHFA house price index rose +0.6% for September, which was on par with expectations. All but one of the nine national regions experienced gains, with the West Coast and Texas/Southern plains states gaining the most ground. Year-over-year, the index has gained +6.1%, which continues to demonstrate a healthy market for house prices.

(+) The final Univ. of Michigan consumer sentiment survey for November was revised higher by over +2 points to 93.8, which surpassed expectations calling for no change at 91.6. Consumer assessments of current economic conditions ticked upward by over a point, while future expectations rose nearly +5, which may well have been election-related due to the period of data collection. Long-term inflation expectations for the coming 5-10 years ticked down a tenth of a percent to 2.6%, but continue to remain higher compared to recent history.

(-) Initial jobless claims for the Nov. 19 ending week increased to 251k, which was just +1k more than expected. Continuing claims for the Nov. 12 week also ticked up, to 2,043k, which was higher than the 2,008k expected. It's possible the prior week was distorted a bit by the Veteran's Day holiday, which could explain a bit of the increase. But, all-in-all, levels remain quite low.

(0) The FOMC minutes from the November meeting, as usual, didn't offer much new insight, but did reiterate the theme that governors saw chances of a rate increase being appropriate 'relatively soon'. Growth was seen in as a mixed bag, while inflation had ticked up and appeared to be more top of mind. Discussion also included the large size of the large balance sheet, which could take time to unwind. This brings the odds of a December hike to almost 95% based on current Fed Funds probabilities, as there are fewer 'excuses' in terms of economic and labor market data to postpone a hike.

Market Notes

Period ending 11/25/2016

1 Week (%)

YTD (%)

DJIA

1.51

12.66

 

S&P 500

1.45

10.45

Russell 2000

2.41

20.17

MSCI-EAFE

1.29

-2.06

MSCI-EM

1.33

7.76

BarCap U.S. Aggregate

-0.20

2.33

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

11/18/2016

0.44

1.07

1.80

2.27

3.01

11/25/2016

0.49

1.12

1.83

2.36

3.01

On a holiday-shortened week, the Dow surpassed another magical milestone of 19,000 and the S&P 500 reached another all-time high, with continued optimism about a Trump administration being able to stimulate economic growth. By sector, telecom led the way, followed by materials, while healthcare lagged as the only group seeing a decline for the week. Higher-beta small caps again beat out large-caps, resulting in impressive year-to-date gains.

Foreign stocks also gained for the most part, with, net of currency effects, U.K. providing the strongest returns followed by Europe. Sentiment appeared to be partially driven by positivity in the U.S., although a bit tempered by political uncertainty, including Italy's upcoming constitutional referendum on Dec. 4, designed to significantly streamline government, although opinions on the matter remain mixed in regard to the law itself and whether it goes far enough.

U.S. bonds lost ground slightly as interest ticked upward in the middle of the yield curve but remained unchanged on the long end. Investment-grade governments and corporates performed generally in line, while high yield and floating rate bank loans bucked the trend with positive results. Foreign bonds were flattish in local terms, but a slightly stronger dollar turned these results into losses.

Real estate also experienced gains, in keeping with broader equities, led by economically-sensitive segments industrials and lodging. Foreign REITs in Asia and Europe also came in with positive returns.

Commodities gained slightly overall. Early in the week, crude oil gained several percent on increased (again) optimism for OPEC to tighten production at their upcoming Nov. 30 meeting, but fell back to earth by Friday to $46 as enthusiasm for some sort of deal again dissipated; natural gas, on the other hand, gained sharply. Industrial metals copper, nickel and zinc gained sharply on growing demand, while 'safe haven' precious metals lost a few percent again as investors sought out risk assets instead.

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 21, 2016.

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