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Week Ending 11/11/2017

Summary

  • Stocks and bonds declined while other assets gained meaningfully helping diversified portfolios
  • The odds that stocks continue higher through the remainder of the year are high based on history
  • Many of the year’s worst losing stocks were the week’s best performers (and vice versa)

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

Notable Market Headlines

Stocks were lower around the world as investors questioned the possibility that a tax plan will get passed in the U.S. Large U.S. stocks declined fractionally, off just -0.2% but still higher year-to-date by a very impressive +15.5%. The biggest daily decline for the week occurred on Thursday. The biggest individual stock losers that day were those stocks with some of the biggest gains year-to-date (the 25 biggest losers are higher by +22.1% on average year-to-date). This behavior is relatively common but can also be looked as investors showing concerns about some of the year’s high flyers.

The 2017 year-to-date gain through the end of October puts 2017 in the top 25% of all years since 1964. Of the past 54 years, large U.S. stocks have been higher in 42 of those 54 years through October. Of those 42 years (excluding 2017) when the market has been higher year-to-date, the market continued higher through the end of the year in 35 of those 42 years (with 2017, of course, unknown today) with an average gain of +4.6%.

Source: Standard & Poor’s, Patton

There were only 6 of the 42 years when there were gains year-to-date that were then followed by losses in the final two months of the year. The worst was in 2007 when U.S. large stocks declined by a cumulative -5.4% in November and December just as the Financial Crisis was beginning to unfold.

The 12 years when the market was negative at this point year-to-date were followed by very different performance results through the remainder of the years. In these 12 years, 6 were followed by declines in November and December. Clearly, given this 54 years of history, the odds that stocks produce a gain during the last two months of the year are much higher when they have already been higher year-to-date such as they are this year.

It has been widely believed that smaller companies would benefit more than larger with the passing of a tax plan. Due to the greater concerns that a tax bill will not get passed, small U.S. stocks continued to underperform large with a decline for the week of -1.4%. This leaves small stocks higher by +8.7% year-to-date.

International stocks fared somewhat better than U.S. stocks but were still lower. Developed country stocks were down -0.7% with the Eurozone experiencing the most pressure. Two countries with larger losses were France and Germany both losing -1.9% while Japan, the biggest developed country, was off just -0.2%. International emerging markets fared much better slipping just -0.1% for the week and remaining higher year-to-date by an incredible +32.2%.

All of the less traditional asset classes, asset classes that tend to provide much added diversification in an overall portfolio, moved higher in spite of the decline in stock prices around the world. Real estate was the biggest winner for the week with a gain of +2.6%. Commodities continued their recent trend higher with a strong gain of +1.0%. Gold also inched higher by +0.4%. Gold has been the best performing of these three year-to-date with a +10.5% gain while real estate is higher by just +1.5% and commodities by +1.2%.

Bond lost value for the week, down -0.5%, and are higher by just +0.8 year-to-date. This decline in bond prices for the week, and resulting higher bond yields, is being blamed on the reduced likelihood of a tax bill being passed.

Winners and Losers by Sector

Source: S&P Compustat

Stock Highlights

Of the 33 real estate stocks in the S&P 500, 29 were higher for the week. The biggest winner in this group, and the best performing S&P 500 stocks overall, was Macerich Co. (MAC), an owner and operator of shopping malls, with a gain of +18.3%. It was reported that a large hedge fund has taken a sizable position in the company and that the hedge fund will likely push for changes or a possible sale of the company. The second best performer in this group was GGP Inc. (GGP), another mall owner, with a gain of +16.2% on speculation of company buyout.All of this is being seen as an indication that the entire real estate group is undervalued given the relatively poor performance of this group in 2017.

Twenty-First Century Fox Inc. (FOXA), a global media and entertainment company, is said to have had talks with Disney (DIS) to sell some of its assets. This is seen as a possible effort of a big company, Disney, seeking to get bigger so that it can better compete against new media companies such as Netflix (NFLX). Twenty-First Century Fox has struggled to grow since 2012 when revenue peaked as illustrated in the accompanying graph. Its stock jumped +15.5% on the news but is only up +2.9% year-to-date.

Source: S&P Compustat

There was a lot of optimism surrounding consumer discretionary stocks for the week. Many of these stocks have been among the biggest losers for the year but posted strong gains for the week. Fueling some of this optimism was a better than expected earnings report from retailer Macy’s (M) and a proposed buyout of toymaker Mattel (MAT) by competitor Hasbro (HAS). Below are some of the week’s biggest winners in this group.

TripAdvisor (TRIP), the popular travel website, reported another quarter of disappointing results causing its stock to collapse for the week by -19.8%. The company’s revenue for the third quarter came in at $439 million while earnings per share were $0.36. The majority of the company’s revenue comes from hotel bookings which came in below last year’s levels causing the biggest disappointment for investors. Competitor Priceline Group (PCLN) also fell -10.4% on the TripAdvisor news.

Economic Indicator - Reported

It was a very quiet week on the economic front.

Consumer Sentiment, a measure of households’ financial conditions and attitudes about the economy, came in below expectations with a reading of 97.8 as compared to the 100.0 estimate. Not only was this below estimates but was also down from the prior month. Concerns are focused on jobs trends, wages, inflation, and interest rates. This November reading, although down, is the second highest of the year.

Weekly jobless claims were up by 10,000 to 239,000 and slightly above estimates. The more closely watched 4-week average though is at its lowest level in more than 40 years!

Economic Indicators – Upcoming

In the coming week we will get a round of inflation reads with the reports coming for both the Producer Price Index (PPI) and the Consumer Price Index (CPI). Both measures, one for wholesale inflation and the other for retail inflation, are expected to be higher by +0.2% when excluding food and energy.

Retail sales, accounting for a major portion of the total economy, are expected to increase by +0.1%. This is coming off a strong prior month number of +1.6% that was impacted by hurricane effects. The consumer is believed to be in good shape. A strong report would provide some further optimism for a strong holiday season.

Reports on Industrial Production, Imports and Exports, and Housing Starts are also expected.

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