Monday Market Review December 2, 2019
In a shortened holiday week, economic data releases included an upward revision for Q3 GDP, stronger durable goods orders, lower jobless claims, and continued mixed but somewhat encouraging results in housing.
U.S. and foreign equity markets gained last week, with continued optimism about a potential trade deal coming to pass. Bonds were little changed, with U.S. fixed income outperforming foreign. Commodities lost ground overall due to lower prices for crude oil and natural gas.
U.S. stocks ticked higher last week as optimism over a trade deal, or at least a ‘phase one’, looked increasingly promising, as did possible intellectual property protections. Accordingly, despite a low volume week due to the holiday, several equity indexes reached new highs. Tech stocks performed well, with the improved China sentiment, followed by consumer discretionary, with decent early retail numbers for the holiday season. Energy stocks declined in keeping with lower prices for crude oil. Real estate fared well, with gains approaching 2% in the U.S., and a percent internationally, as interest rates remained contained and investors rewarded ‘low vol’ groups.
Foreign stocks gained as well, albeit to a lesser degree than domestic equities. Strength in Europe and the U.K. was offset by declines in Japanese equities. Despite continued close ties to trade, European sentiment continues to see improvement from bottoming levels. Emerging markets were mixed, with countries sensitive to lower oil prices generally experiencing a poorer week than those that aren’t. Protests in several South American nations, including Chile and now Columbia, have affected market sentiment; however, the market cap of those nations remains quite small in the context of global equity market impact. (Latin American equity indexes themselves are generally dominated by Brazil, with Mexico second-largest.)
U.S. bonds were little changed on the week, as the yield curve by only a few basis points. Long duration governments and high yield offered returns slightly higher than broader bond indexes. Foreign developed market bonds were little changed, while emerging market local bonds lost nearly a percent.
Commodities generally lost ground, as weakness in the energy complex outweighed minimal changes elsewhere. The price of crude oil fell by over -4% to just over $55/barrel, surpassed by a -15% correction in natural gas prices due to forecasts for warmer weather ahead to break the cold snap.
(+) The second report of U.S. gross domestic product for Q3 included a revision higher by 0.2%, to a level of 2.1%—this exceeded expectations calling for no change. Personal consumption was consistent with the initial report, growing at a 2.9% rate, and continued to help the overall figure, while intellectual property and state/local spending were revised downward. Inventories improved by a few tenths of a percent, and appeared to be the primary catalyst in moving the overall figure higher, although that metric tends to be transient, and may weigh on Q4 results. Core PCE inflation was revised down slightly to a 2.1% rate for the quarter.
Thus far, average economist estimates for Q4 GDP have been pointing to a growth rate of 1.5-2.0%. Real-time tools created by the Federal Reserve are mixed. The Atlanta Fed’s GDPNow model is currently pointing to 1.7% growth, similar to consensus, and rebounding from 0.0-1.0% expected growth in early November. The extremely granular New York Fed Nowcast shows expected growth of 0.8%, which is actually an improvement on the prior few weeks, due to positive input from the housing market, offsetting generally weaker manufacturing numbers that have held back most forecasts.
(0) October’s personal income was unchanged, below expectations of 0.3%, with an increase in wage/salary income offset by lower real disposable personal income. Personal spending rose by 0.3%, which matched consensus. Personal income and spending have each risen by a rounded 4% year-over-year, which is in keeping with stronger wage growth. The monthly net changes took the personal savings rate down by -0.3% to 7.8%. PCE inflation for October rose 0.2% on a headline level and just under 0.1% for core, which brought the year-over-year inflation figures to 1.3% and 1.6%, for headline and core, respectively, which lie far below the Fed 2.0% target. Continued low inflation readings are one reason why eventual rate hikes, following a period of consecutive cuts, appear less likely for some time (as the Fed has stated).
(+) Durable goods orders for October rose by 0.6%, beating the median forecast calling for a decline of -0.9%. Removing transportation orders did not change the total growth figure, which was somewhat unusual. However, core orders rose by a stronger 1.2%, and core shipments rose 0.8%—each were far stronger than expectations for declines in both areas, which even included upward revisions for prior months. The segments of aircraft, fabricated metal and industrial machinery led the way in October. Compared to a year ago at this time, orders are down nearly -1%, although the weakness was primarily in the first half of the year, as the latter few months have picked up steam.
(+) The FHFA house price index rose 0.6% in September, which outperformed the median forecast calling for 0.3%. Every region experienced a positive month, led by East South Central; (KY/TN/MS/AL) and South Atlantic, each of which rose 1-2%. The national year-over-year rate of change also improved by 0.3% to 5.1%—a number which continues to run at a growth rate far above the long-term average.
(+) The urban S&P/Case-Shiller home price index rose by 0.4% for September, also beating expectations of 0.3%. As with the FHFA, prices rose in almost all areas, led by the West Coast (Seattle, LA and Phoenix all gained over a half-percent), while San Francisco and Chicago prices fell by a few tenths. Year-over-year, this index ticked up a tenth of a point to 2.1%, which remains closer to long-term trend levels of matching inflation.
(0) New home sales for October fell by -0.7% to a seasonally-adjusted annualized level of 733k units, but surpassed median expectations calling for 705k. However, revisions for prior months boosted the number and mitigated the decline—notably September becoming the strongest month in 12 years. Regionally, the West and Midwest saw monthly gains, while the South and Northeast saw lower unit sales. Sales are up over 30% from this time a year ago, which demonstrates both the volatility in the series and the recent pick-up in activity. The months supply of new homes ticked up a tenth to 5.3, while the median sales price came in at $316,700 (down over -3% from this time last year, interestingly).
(-) Pending home sales fell -1.7% in October, relative to a small gain of 0.2% expected. Regionally, sales rose in the Northeast slightly, while all other regions declined, led by the West and Midwest, down -3% each. Year-over-year, the pace of pending sales also declined by a few percentage points, but remained positive, at 4%. This metric usually points to forward-looking conditions for new home sales.
(+) The advance edition of October’s trade deficit showed a drop of -$4 bil. to -$66.5 bil., tighter than the -$70.0 bil. level expected. Imports fell by -$5 bil., which appeared to be concentrated in consumer goods and autos—reflecting the imposition of September tariffs on Chinese goods. The decline in imports more than overwhelmed the -0.9% decline in exports, which were focused in consumer and agriculture and also appeared to be connected to tariffs or avoidance of.
(-) The Conference Board’s index of consumer confidence for November ticked down by -0.6 of a point to 125.5, underperforming an expected increase to 127.0. Perceptions of current conditions fell by nearly -7 points, but was partially offset by an improvement in expectations for the future, which gained over 3 points. The labor differential, which measures the ease in finding jobs, fell by -4 points.
(+) Initial jobless claims for the Nov. 23 ending week fell by -15k to 213k, which was beyond the median forecast calling for 221k. Continuing claims for the Nov. 16 week fell by a dramatic -57k to 1.640 mil., far below the consensus forecast of 1.691 mil. In fact, the continuing claims number was the lowest reading in over 45 years. While no anomalies were reported, Veteran’s Day could have played a role, as claims numbers can be heavily affected by holidays. Nevertheless, claims levels remain extremely low, especially considering population growth.
Provided by: Ryan Long, CFA, Director of Investments, Focus Point Solutions
Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, First Trust, Goldman Sachs, Invesco, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. 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.