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Weekly Review - November 27, 2017

Weekly Review - November 27, 2017

Website Administrator - Monday, November 27, 2017

Summary

On a shortened Thanksgiving week, the few economic reports that surfaced were mixed, with slightly weaker durable goods orders, while existing home sales and jobless claims were positive, and the index of leading economic indicators was quite strong.

Global equity markets fared positively, with U.S. small caps and foreign stocks faring well on the heels of a weaker dollar. Bonds ended up with slight gains as interest rates ticked downward slightly, with foreign bonds faring better. Commodity indexes were higher as crude oil rose to its highest price in over two years.

Economic Notes

(0) The late Oct./early Nov. FOMC meeting minutes pointed to several interesting conclusions. Notably, these concerns were mostly focused on persistently lower inflation results, which were again blamed on temporary factors, and expected to reach target again in the next year or two. Another concern expressed was the potential build-up of financial imbalances, such as higher asset prices and lower volatility, in no small part due to perpetual low rates. These areas are more difficult as they range somewhat outside of the traditional mandates of inflation and employment. Overall, sentiment from committee members continues to point to a December rate hike.

Interestingly, on a more current Fed topic, the administration is reportedly considering Mohamed El-Erian, the former CEO of PIMCO, as the Fed's Vice Chair. El-Erian has been a frequent market commenter in recent years, so his views aren't necessarily a mystery to many participants. For the most part, in keeping with that firm's broader views, he has been an adherent of the 'the new normal' or 'lower for longer' theme, generally in keeping with slower overall world growth and muted inflationary pressures. This could be seen by the market is more dovish than hawkish.

(-) Durable goods orders for October fell -1.2%, counter to an expected increase of +0.3%. The headline number was driven by a drop in a typically-lumpy series, non-defense aircraft and defense goods, particularly in aircraft orders. Removing transports, orders were actually up +0.4%. On a core side, removing the most volatile components, orders also fell by -0.5%, in contrast to an expected gain of +0.5%. Core capital goods shipments, however, gained +0.4% for the month, which was a tenth of a percent stronger than expected. Recent results in 2017 for this series have been solid, although they continue to be subject to month-to-month lumpiness.

(+) Existing home sales for October rose +2.0% to a seasonally-adjusted annualized level of 5.48 mil. units, which beat forecasts calling for a minor +0.2% gain. The dispersion of type was broad, with single-family and condos/co-ops each gaining at a similar rate. Regionally, sales were strongest in the Northeast and West. A key metric of note is the shrinking level of inventories may be acting to depress sales to a certain degree.

(+) The Conference Board's Index of Leading Economic Indicators for October came in sharply higher, rising +1.2%, led by strong performance in most components including low levels of initial jobless claims, building permits, ISM manufacturing orders and consumer sentiment. Gains for the past six months are just as impressive, with gains at a +5.9% annualized rate, compared to a +4.6% for the prior six months. The coincident and lagging indicators also rose for October, by +0.3% and +0.2%, respectively. While the individual components of these indicators are already well-tracked, the correlation between the broader index and upcoming economic growth, as well as potential turning points, remains the most important takeaway. In that sense, the series points to continued strength.

Index of Leading Economic Indicators for October 2017

(+) The Univ. of Michigan index of consumer sentiment ticked up +0.7 of a point to 98.5, outperforming an expected small gain to 98.0. The results were driven by expectations for the future, while assessments of current conditions ticked down by a tenth of a point. Inflation expectations for the coming year fell a tenth of a percent to +2.5%, while those for the coming 5-10 years came in at just under that at +2.4%, which is a low point from the recent year's range.

(0) Initial jobless claims for the Nov. 18 ending week fell by -13k to 239k, which was just a touch below the 240k expected. Continuing claims for the Nov. 11 week ticked up +36k to 1,904k, which was higher than the 1,880k expected. On the initial claims side, it appeared that hurricane-related claims continued to fall back to more normalized levels, with gains coming from a variety of other states, as is more typical. Overall, the data continues to point to a very strong labor market, as indicated by low levels of layoffs and other job losses.

Market Notes

Period ending 11/24/2017

1 Week (%)

YTD (%)

DJIA

0.89

21.83

S&P 500

0.93

18.36

Russell 2000

1.77

13.21

MSCI-EAFE

1.46

22.68

MSCI-EM

2.40

33.65

BlmbgBarcl U.S. Aggregate

0.19

3.39


U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2016

0.51

1.20

1.93

2.45

3.06

11/17/2017

1.29

1.73

2.06

2.35

2.78

11/24/2017

1.29

1.75

2.07

2.34

2.76

On a Thanksgiving-shortened week with no political news due to Congress being out on break, U.S. stocks experienced strong gains, led by continued strong sentiment for technology stocks, followed by consumer discretionary and industrials. Defensive utilities and consumer staples lagged with gains just above zero. Preliminary results from Black Friday and Cyber Monday are promising, but more clarity is needed—a key focus will likely be the performance of the broader retailing group as opposed to Amazon and Wal-Mart, which are seen as having the dominant internet presence. The coming week or two will likely add more legislative drama, with the Senate's version of the tax bill under review and up for potential vote, as well as the delayed-until-now Dec. 8 deadline when temporary government funding expires. If a new bill isn't passed, chances of a shutdown are still lurking.

In other sector news, the S&P officially announced that the current Telecom Services (currently representing just a few percent of the overall index, most of which is the stock of Verizon and AT&T) will be expanded into a new 'Communications Services' sector, representing about 10% of the overall index. In addition to current telecom constituents, it will also bring in a variety of media/broadcasting, entertainment and internet firms from the consumer discretionary and technology sectors, such as Comcast, Disney, Netflix, Facebook and Alphabet/Google. This is slated to take effect next September.

Foreign stocks generally came in with results below those of U.S. equities in local terms, but a weaker dollar pushed returns about a percent higher for both developed and emerging markets. Growth in Europe remained strong in relative terms, at a year-over-year rate of +2.5%—the strongest in a decade. Emerging markets outperformed, with strong results from the BRIC nations, with the exception of China, where governmental tightening of financial conditions for the purpose of credit risk reduction carried over to lower sentiment for equities. Interestingly, Turkish stocks were among the worst performers as the nation's president criticized its central bank for keeping interest rates high (and raising them again) to combat high inflation—keeping rates in alignment with inflation is a typical approach in order to sustain reasonable 'real' yields, but can certainly have other side effects.

In Germany, the process for forming a new government continues, as Merkel's conservative party is pursuing a coalition with the Social Democrats, in lieu of talks falling apart with the greens and pro-business parties. Although this always sounds extreme, this type of event is common outside of the U.S. system and European markets weren't sharply affected. In the most extreme case, could be the catalyst for a new election, but expectations remain for a status quo outcome, with more progressive fringe groups on the edges not likely able to gain enough support to cause disruption.

U.S. bonds experienced slight gains as long-term interest rates ticked down a bit to further flatten the yield curve. Longer government bonds and investment-grade corporates fared best, as did high yield. Developed and emerging market foreign bonds performed similarly in local terms, while the weaker dollar pushed returns about a percent higher.

Real estate ticked slightly higher in the U.S., with gains in mortgage REITs offset by weakness in retail/malls. European and Asian real estate fared significantly better on the back of a weaker dollar.

Commodity indexes gained, along with a weaker dollar. Crude oil rose nearly +4% to $58.95, the highest price since June 2015, as the result of the controversial Keystone pipeline shutting down due to an oil leak of over 200,000 gallons, which will reduce oil deliveries to the U.S. by 85% through the end of November. The magnitude of the spill has again raised concerns about the pipeline's environmental impact. Industrial metals also fared well, with large gains in the prices of copper and nickel, driven by expectations for Chinese growth, while precious metals fell back a bit.

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 20, 2017.

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