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Weekly Review - November 30, 2015

Weekly Review - November 30, 2015

Guest Post - Monday, November 30, 2015

Summary

  • In a short holiday week, economic data was mixed, with durable goods and housing statistics generally higher, while consumer confidence indicators fell for the month.
  • Markets experienced a typical tame holiday week, with U.S. large-cap stocks coming in flat, small caps doing a bit better, and foreign stocks mixed. Bonds earned small gains with interest rates declining in the middle portion of the yield curve. Commodities were also flattish on net, with oil ending the week close to where it started, but gold continued its recent declines.

Economic Notes

(+) Durable goods orders rebounded from a few weaker recent showings by rising +3.0% in October, which outperformed the forecasted gain of +1.7%. Core orders, removing the more volatile components, ended up with a +1.3% gain, which outperformed the anticipated +0.2% increase. Core shipments, which are a direct GDP input, fell by -0.4%, which was just a tenth worse than anticipated. The strong dollar has certainly been a headwind in this area, at least in terms of exports.

(0) Personal income in October rose +0.4%, which was on target with expectations, while personal spending gained +0.1%, underperforming by a few tenths. The combination of these took the savings rate to 5.6%, which is the highest it’s been in about 3 years. The PCE price index rose +0.1% on a headline level and came in flattish on a core level (after rounding), with clothing and footwear falling in price along with health care. Year-over-year, the headline and core PCE indexes are up +0.2% and +1.3% respectively, reflecting similar trends in other inflation readings, although the spread between headline and core here is a bit tighter than in CPI, for example, over the trailing year.

(+) The S&P/Case-Shiller home price index rose +0.6% in September, which was double the +0.3% increase forecast—all on a seasonally-adjusted basis, per usual convention. Every member of the 20-city survey group experienced gains, with over-1% performances by San Francisco and Miami leading the way. Year-over-year, the index has gained +5.5%, which shows a few tenths of acceleration from the prior month. Price growth has continued to show strength in a recovery trajectory from the financial crisis, and has been possibly helped from lower-than-trend building activity for single-family homes.

(-) Existing home sales for October declined by -3.4%, which surpassed the expected -2.7% drop and reversed a strong showing in the prior month. It appeared that weaker sales in the South and West were the primary culprits. At the same time, median sales prices were higher on a year-over-year basis by +6%.

(0) New home sales in October rose by +10.7% to 495k, beating forecast of +6.8%, although the prior month’s decline was revised downward, which tempered some of this effect. Sales increased in three of the four national regions last month, with +23k in the Northeast and South, while the West declined by -1k. Year-over-year, new home sales are up +4.9% over a year ago, while median home sales prices have fallen -9% from a year ago at this time to $281,500.

(+) The advance goods trade balance report for October showed an improvement in the deficit of just under -$1 bil. to -$58.4 bil. Goods exports fell by -3%, reversing an increase in the previous month and goods imports fell by -2%. Import declines appeared to be due to industrial supplies/materials (which includes energy-related items) and likely contributed to the drop.

(-) The Conference Board index of consumer confidence fell in November from 99.1 to 90.4, which sharply disappointed relative to the expected 99.5 reading. The headline reading included a deterioration in both current economic conditions and forward-looking expectations, while the labor differential that measures the ease in finding jobs also dropped off a bit.

(-) The final University of Michigan consumer sentiment index for November fell several points from the initial monthly estimate to 91.3, compared to expectations of an unchanged 93.1. The key change factor was a decline in consumer expectations; interestingly, the timing of this particular survey included the terrorist events in Paris, while the Conference Board confidence measure did not. Inflation expectations for the upcoming 5-10 years also ticked up a tenth to 2.6%, but remains below average.

(0) Initial jobless claims for the Nov. 21 ending week came in at 260k, which was a positive surprise compared to the expected 270k. Continuing claims for the Nov. 14 week rose by +34k to 2,207k, which was higher than the 2,161k anticipated. Claims levels remain consistently low, which is of course, a positive.

(+) The 2nd estimate of the 3rd quarter GDP number was revised upward from +1.5% to +2.1%, which was on target with the forecasted improvement assumed by consensus. Inventory accumulation was bumped up higher than expected for the quarter, which is a primary ‘swing’ number that affects adjoining quarter GDP figures to a better or worse degree. On the other side, real final sales growth was taken down a few tenths. Analysts expect the revisions to positively affect Q4 GDP, of which estimates remain in a similar 2.0-2.5% range at this point.


Read the "Question for the Week" for November 30, 2015:

Where are we at this stage of the economic recovery?


Market Notes

Period ending 11/27/2015

1 Week (%)

YTD (%)

DJIA

-0.10

2.18

S&P 500

0.08

3.48

Russell 2000

2.35

0.99

MSCI-EAFE

-0.47

0.83

MSCI-EM

-2.03

-13.59

BarCap U.S. Aggregate

0.14

0.82

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

11/20/2015

0.12

0.93

1.70

2.26

3.02

11/27/2015

0.18

0.92

1.64

2.22

3.00

While stock-specific, Pfizer’s announced merger with Allergan (a $160 bil. deal) would be the largest pharma transaction ever as well as being potentially the largest ‘tax inversion’ deal—the latter being the primary point of focus. Essentially, Allergan would serve as acquirer and relocate the firm to Ireland to save taxes. This isn’t the first company to do this by any means, but larger transactions like this have raised the eyebrows of regulators and politicians in an environment where tax reform (especially on the corporate side) has been slow to happen.

European stocks fared well on the week, as a survey of business growth was shown to have hit a 4-year high, with German manufacturing and services and improved employment adding to hopes for recovery sooner than later (Euro area PMI rising to over 54, in decent expansionary territory). Gains in Euro currency terms were offset somewhat by dollar strength, which tempered foreign stock returns. Towards the end of the week, Chinese stocks declined dramatically as several industrial companies reported a major decline in profit year-over-year and regulators decided to ban derivatives financing for equity trading, in one of perhaps several steps of tightening risk-taking rules for brokerage firms. Overall, emerging markets were among the weaker performers, with Turkey losing nearly -10% upon geopolitical concerns and Latin America also experiencing losses on the week.

U.S. government and investment-grade corporate bonds gained slightly as interest rates fell, with the mid/5-year area of the curve most heavily affected. Most other segments were relatively tempered in performance, returning a few basis points above or below zero for the week. Foreign-currency denominated European debt fared best on the week with lower interest rates, while emerging market local bonds fell about a percent, lagging the pack.

Real estate indexes generally gained about a percent, outperforming other equities, led by U.S. lodging/resorts and health care. Asian and European REITs all underperformed, especially in USD terms, perhaps affected by geopolitics in Eastern Europe and carryover from the Paris terrorist attacks.

Commodities were little changed on the week, with the energy complex surprisingly flat on net, but precious metals falling by nearly -2%, led by declines in gold, which is expected to look much less attractive to safety-seeking investors in a regime of higher interest rates on Treasuries. Crude oil jumped almost $2/barrel on geopolitical events in the Middle East before falling back to just under $42 by Friday. Saudi Arabia has agreed to work with OPEC and non-OPEC countries to stabilize oil prices. OPEC is meeting in early December, and trader worries over possible production cuts to boost prices appears to be balancing the cross-currents of high supplies a bit.

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, T. Rowe Price, 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 23rd, 2015.

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