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23 December, 2017 Market Commentary

Market Commentary - Week 51

Week Ending 12/23/2017

Summary

  • Signing of the new tax bill did little to help markets this week but hopefully will fuel more long-term confidence and optimism
  • Energy stocks were big winners in the market while Utility stocks saw their worst selloff since the election more than a year ago
  • Economic data remains strong with a surge in new homes sales that was the biggest in 25 years

Source: S&P Compustat, www.yahoo.com/finance for Commodities

Notable Market Headlines

Stocks were higher in both the U.S. and around the world as investors continue to remain optimistic that economic growth will continue and possibly accelerate. The signing of the new tax bill by President Trump did little to help the markets this week but it is widely believed that it will provide further lift to the market long-term.

U.S. large stocks gained +0.4% while small U.S. stocks moved higher by +0.6%. Large stocks continue to outpace small year-to-date by a significant margin with large stocks up +19.7% and small stocks up +13.6%. Helping these broad averages move higher this week were energy stocks posting a very impressive +4.4% gain for the week. Some of the biggest winners in this group are highlighted in the below Stock Highlights section. In spite of the big gain, the energy sector remains lower year-to-date by -5.0%.

Even though the broad averages were higher for the week, multiple sectors were lower including financials, technology, health care, consumer goods and utility stocks. Utility stocks were the biggest losers, down -4.0%, the biggest weekly decline in more than a year. This decline was in spite of opinions that the tax bill is expected to be good for utility companies. As the accompany graph shows, this group remains higher year-to-date by more than 10% in spite of the week’s decline.

Source: www.yahoo.com/finance for symbol XLU

International stocks were higher for the week with developed market stocks gaining +0.2% and now up +21.4% year-to-date. Emerging markets did better with a +0.7% gain. Latin American markets were the leaders among the emerging markets this week while Mexico and South Korea had fairly sharp declines of -3.7% and -3.4% respectively. Year-to-date emerging markets have been the hands-down winners with a gain of +32.8%.

Real estate stocks were hit hard this week with a decline of -2.3%. This pushes the group back into negative territory year-to-date down -1.1% for the year. This decline in prices was a bit of a surprise given some of the view that the new tax bill should be favorable to this group.

Gold and commodities were higher for the week adding value to well-diversified portfolio. Gold gained +1.5% and is again up more than 10% for the year. Commodities, helped by a rally in oil prices, gained +2.1% and are now back into the black for the year with a +1.1% year-to-date gain. These two asset classes have lagged behind most others so far in 2017 but do add meaningful diversification value to a portfolio.

Bond posted one of their larger declines this week of -0.6% pushing yields higher. This could be explained by the expectation that the new tax bill will add to long-term government deficits and ultimately higher interest rates. That said, it’s always difficult to know what moves prices during a shorter term. Year-to-date bonds are up just +0.7%.

Winners and Losers by Sector

Source: S&P Compustat

Stock Highlights

As noted above, the energy sector was the best performing this week with a gain of +4.4%. Some of the leaders in this group posted even bigger gains as illustrated in the accompanying table but many of these stocks remain lower year-to-date. If the rally in the price of oil can persist, investors in energy stocks are hopeful these stocks will continue to recover as well.

Source: S&P Compustat

Discovery Communications (DISCA), a global media company, stock rallied +12.8% for the week. This company provides media content across various platforms including its widely known Discovery Channel. The company is seen as a possible takeover target given the recent deal between Disney (DIS) and 21st Century Fox (FOXA) and the need for media companies to continue to get larger to compete. Discovery’s stock needed a boost this year with it still lower by -13.4% year-to-date even after the week’s rally.

Besides the many utility stocks losing value as discussed in the Market Headlines section above, one other notable loser was Chipotle Mexican Grill (CMG). This company operates more than 2,000 restaurant locations. A report indicating an outbreak in Los Angeles pushed the stock lower this week by -5.4%. As the accompanying graph indicates, this company has not been able to recover from an E. Coli breakout in 2015. Its stock remains off its 2015 high by -61%.

Source: www.yahoo.com/finance

Economic Indicator - Reported

New Home Sales came in much stronger than expected at an annualized 733,000 as compared to an estimate of 650,000. This was a +17.5% surge over the month before representing the biggest jump in 25 years. The west and south regions of the country showed the biggest gains. Important to note is that average prices declined by -0.3% indicating builders giving discounts to sell homes. This report can be volatile but is still a strong indicator for the economy.

Existing Home Sales came in stronger than expected as well with the annualized number at 5.81 million as compared to an estimate of 5.55 million. This was a 5.6% jump over the month before and represents the strongest number in several years. Prices were strong but inventories did fall which could put downward pressure on future reports due to fewer homes available to sell.

The final reading on third quarter Gross Domestic Product (GDP) came in at 3.2% or 0.1% below the prior estimates. This remains one of the strongest quarters in a couple of years with expectations it has remained strong into the fourth quarter.

Economic Indicators – Upcoming

The most closely watch S&P Corelogic Case-Shiller Housing Prices Index will be reported for the month of October. This index tracks only resale single family home prices excluding new construction and condominiums. This has been a consistent bright spot in the economy in 2017 including both an increase in all 20 major cities last month and a year-over-year gain of +6.2%. October is expected to show another gain across the 20 cities of +0.6%.

The accompanying graph shows the trend in housing prices for the 20-city average (blue line) and select cities. The 20-city average just went above its 2007 high in April of this year. Some cities, such as Miami (yellow line) and Las Vegas (not shown), remain below their all-time highs but have recovered significantly while others, such as Dallas are at all-time highs.

Source: S&P Dow Jones Indices

Consumer Confidence has been extremely strong in 2017 as well hitting a 17-year high in the prior month. Economists expect this to ease somewhat for December to a reading of 128.0 down from 129.5. Strong consumer confidence bodes well for strong retail sales which in turn fuels growth in the economy.

Contact Mark A. Patton :