• Jeran Van Alfen, CFP®

Monday Market Review: November 22, 2021

Summary

Economic data for the week included strong reports for retail sales and industrial production, as well as a re-acceleration in manufacturing indexes. Housing data was mixed, while jobless claim improvement has flattened a bit as of late.

Equity markets were mixed in the U.S., but declined throughout the rest of the world. Bonds were flattish in the U.S., but lagged globally with a stronger dollar. Commodity prices fell back as oil inventories rose.

Economic Notes

(+) Retail sales for October rose by 1.7%, surpassing expectations calling for 1.4%. On a core/control level, removing the more volatile components, sales still grew 1.6%, which was nearly double the consensus estimate. Leadership in the month included non-store/internet retail, autos, electronics, and gasoline (due to spiking prices); on the lackluster side were health and personal care. Overall, retail sales remain up over 16% over the trailing 12 months. Certainly, inflation has played a role in boosting nominal sales numbers, although general spending activity has continually strengthened regardless. As with GDP generally, it’s possible these year-over-year gains are near peak levels, with an expected slowing as we move into 2022 and the extreme base effects and reopening gains start to look less extreme.

(-) Import prices rose 1.2% in October, which beat expectations calling for 1.0%. Removing petroleum from the headline number reduced the increase to 0.5% (due to energy’s 8% gain during the month). Gains were also seen in industrial supplies (up 4%), food, autos, and other consumer goods—all in keeping with manufacturing and supply disruptions.

(+) Industrial production in October rose by 1.6%, reversing a decline the prior month and beating the median forecast calling for 0.9%. This was highlighted by a gain in manufacturing production, with the anecdotal mention that Hurricane Ida’s waning impact accounted for about half of the overall index’s gain. Looser restrictions in Asia helped release semiconductor supply, which, in turn, helped auto production rise 11% for the month. Business equipment was the laggard, only gaining a few tenths of a percent for the month. Capacity utilization rose by 1.2% to 76.4%.

(+) The Philadelphia Fed manufacturing index rose by 15.2 points to a strongly-expansionary 39.0 level, exceeding forecasts calling for 24.0. Under the hood, new orders rose to the highest reading in nearly 50 years, along with stronger shipments. Employment fell by a few points, but remained expansionary. Prices paid and delivery times also experienced higher readings. Expectations for business conditions six months out rose by over 4 points to 28.5, representing positive sentiment for the future.


(+) The Empire manufacturing index rose 11.1 points in November to a level of 30.9, beating expectations calling for 22.0. Under the hood, shipments, new orders, and employment all rose strongly and further into expansionary territory. Prices paid also rose, in keeping with trend, while delivery times improved from the prior month—welcome news in today’s supply-hampered world. On the downside, expected business conditions six months out fell by -15 points, but remained solidly in expansion. No doubt supply constraints have been holding back activity for these regional indexes, although metrics otherwise continue to show strong potential.


(-/0) Housing starts for October declined by -0.7% to a seasonally-adjusted annualized level of 1.520 mil. units, in contrast to an expected 1.5% increase. Single-family starts fell -4% to lead the index, while multi-family gained 7%. The Midwest was the sole gaining region, up 6%, while the other areas all declined up to a few percent each. On a year-over-year basis, starts are up a fraction of a percent, which is simply the net difference between a surprising -11% decline in single-family starts and nearly 40% gain in multi-family. The latter is in response to rising urban rents. Building permits for the month, on the other hand, rose 4%, reversing a sharply negative prior month and surpassing expectations of 2.8%. Multi-family gained 7% here as well, followed by single-family, up 3%. Permits rose in all four national regions, led by the Midwest and West.

(+) The November NAHB housing market index rose by 3 points to 83, surpassing expectations which called for no change. Under the hood, current sales and prospective buyer traffic each rose in line with the overall index, while future sales were flat. Three of the four national regions rose a few points, with the exception of the Northeast, which fell by -4. This sentiment survey points to stronger housing start activity in months ahead.

(+) The Conference Board Index of Leading Economic Indicators for October rose by 0.9%, reaccelerating from the prior two months. The group’s components were widely positive, led by improved jobless claims, yield spread, and building permits; the negative contributors were average workweek length and consumer sentiment. The coincident index and lagging index rose 0.5% and 0.4%, respectively. Over the last six months, the leading index rose at an annualized rate of 9.4%, which was just above the 9.3% annualized rate of the prior six months ended in April. As seen with individual data reports, conditions continue to show recovery growth, which reduces the chances of a near-term recession (the most important signal this report usually shares).


Source: The Conference Board. Shaded areas indicate recessions, as defined by the NBER.

(+/0) Initial jobless claims for the Nov. 13 ending week declined by -1k to 268k, a bit above the median forecast of 260k. Continuing claims for the Nov. 6 week fell by -129k to 2.080 mil., below the consensus forecast calling for 2.120 mil. Initial claims fell more dramatically in KY, TN, and OH, while CA experienced the largest increase. While improvement continues, it has slowed in recent weeks.

Market Notes


U.S. stocks ended mixed, with the mega-cap Dow and small-cap Russell 2000 negative on the week, while the S&P 500 inched slightly positive. By sector, consumer discretionary and technology both gained a few percent on the week as essentially the only gaining sectors, due to strength in Amazon, Home Depot, and Tesla. On the downside, energy, materials, and financials fell back by several percent. Real estate was little changed on the week, in keeping with minimal changes in interest rates.

The news environment has been mixed, with decent economic data coupled with continued inflation fears and recent rise in Covid cases globally. The initial $1 tril. infrastructure bill was signed into law by the President early in the week. What’s left is the secondary social spending-focused bill now being moved from the House to the Senate. The debt ceiling is top of mind again, with a large chunk of money leaving the treasury to fund highway projects in keeping with the just-passed infrastructure bill. This leaves less in the coffers for everything else, with a projected deadline of early- to mid-December for another agreement being needed (after it was punted forward several weeks ago). While hopes are high that a showdown can be avoided, 11th hour negotiations could add volatility to markets.

Foreign stocks ended weaker across the board last week, not helped by a stronger U.S. dollar. Japan fared best, with the smallest losses, while Europe, the U.K. and emerging markets ended further into the negative. Japan announced a half-trillion dollar spending package to help with economic damage caused by Covid. Interestingly, this runs counter to the trend in other developed nations, which had been starting to pull back on fiscal crisis measures. Rising Covid cases across Europe have resulted in more lockdowns. In fact, daily infections in some countries, such as Germany (described as under a new ‘state of emergency’), Norway, Netherlands, and Austria (under a more severe lockdown) are again at 100% of their prior all-time high (from late 2020). However, overall death rates are lower. Questions are now focused on the growing case rate among the vaccinated, which points to waning vaccine efficacy, and the need for boosters—currently under government review. Long-story-short, these new Covid waves tend to dampen market sentiment and delay the potential ‘final’ recovery. Emerging markets were negative across the board, with Brazil and Turkey faring worst.

U.S. bonds were flat to slightly higher on the week, with interest rates ticking down slightly along the treasury curve. Corporates underperformed treasuries, especially high yield and floating rate bank loans, with were slightly negative. Foreign bonds were held down by a stronger dollar, especially in the emerging market local segment, which lost well over a percent.

Commodities fell back on the week generally as the U.S. dollar strengthened. While metals were down to a lesser degree, the energy sector fell by nearly -4%. While natural gas gained several percent, the price of crude oil declined by -6% to just under $76/barrel. OPEC+ continues to refuse requests from a variety of nations (U.S. and Asia mainly) to increase oil production, in an attempt to lower currently-high prices. Instead, releases from national stockpiles, normally done in emergency conditions or under times of extreme market stress, look to be the next course of action. High gasoline prices are a key hot button in consumer sentiment surveys, with over $5/gallon readings in some urban locations straining budgets—of the lower-income particularly.

Have a good week.

Ryan M. Long, CFA

Director of Investments

FocusPoint Solutions, Inc.

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. 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.

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