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25 November, 2017 Market Commentary

Market Commentary - Week 47


Week Ending 11/25/2017

Summary

  • Stocks rallied around the world with U.S. indexes closing at record highs
  • Retailers have generally had a good start to the holiday shopping season
  • Economic data remains strong with economists expecting continued strength

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

Notable Market Headlines

Stocks rallied around the world fueled by, what is believed to be, optimism about economic growth in both the U.S. and international economies as well as strong corporate earnings. Although U.S. markets were the only ones to reach record levels, the strong gains this week were in international markets.

In the U.S. small stocks lead the rally for the second consecutive week with gains this week of +1.7%. Although there are risks that a tax bill will not get passed, a bill that is believed will be very good for smaller companies, optimism remains and continues to help these stocks.

Large U.S. stocks posted strong gains as well up +1.0% for the week. The S&P 500 and tech-heavy NASDAQ Composite closed at record highs while the Dow Jones Industrials did hit a record earlier in the week but closed the week a fraction of a percent off its high. The performance strength of some leading technology stocks had slowed but resumed this week with this sector leading all others with a gain of +1.9%. Year-to-date large stocks continue to lead small stocks by a margin of +4.6% but the gap has once again narrowed the past couple of weeks.

As strong as U.S. stocks were, international markets were stronger and helped fuel the performance of well-diversified portfolios. International developed country stocks gained +2.1% for the week and are now higher by +21.8% year-to-date. The markets in several countries did very well with better than 2% gains in Japan, France, and Italy. International emerging markets also posted very strong gains up +1.9% for the week and +36.3% year-to-date. China, the largest of the emerging markets by a wide margin, posted some of the biggest gains for the week up +3.1%.

The big rally in emerging markets has raised some questions among investors whether the rally can persist. In this blog a couple of weeks ago, I looked at the performance of U.S. stocks year-to-date and the odds that the rally continues through the remainder of the year…the odds were high. I’ve done the same for emerging markets.

Of the 18 years in the past when emerging markets where higher year-to-date through the end of October, they continued higher in all but 4 years. The accompanying graph shows the performance of emerging markets for just the final two months of the year, November – December. They are in order of the years with the lowest year-to-date gains on the left to those years with the highest year-to-date gains on the right. Two key takeaways from this graph are the following: 1.) 2017’s strong performance, although very impressive, was topped by better performance in 8 earlier years; and 2.) the November – December performance tends to be better when in years when the October year-to-date performance was better (years on the right side of the graph).

Source: MSCI Emerging Market Index, Patton Funds

Of the less traditional asset classes, Commodities were the best performing helped by the continued rise in the price of oil. For the week Commodities gain +1.3%. Year-to-date Commodities are only higher by +1.7% but since their June low have risen +20.8%. Gold remains the best performer year-to-date of this non-traditional group with a gain of +11.6% in spite of this week’s decline of -0.4%. Real estate inched higher for the week with a gain of +0.2%.

Bond prices remain relatively high with yields remaining relatively low. A strong economy and tight labor market should yield higher inflation and higher bond yields but neither have yet materialized. In spite of this unusual phenomena, the Federal Reserve is still expected to raise interest rates again next month. Bonds inched higher by +0.2% for the week.

Winners and Losers by Sector

Source: S&P Compustat

Stock Highlights

All eyes are on retailers as the holiday shopping season kicked off. Amazon was the winner with a gain of +5.0% for the week, adding another $27 billion to its market value!, but there were many winners as the accompanying table shows. Notably not on the list were discounters Wal-Mart, down -0.8% for the week, and Costco higher by only +0.4%.

Source: S&P Compustat

TripAdvsisor (TRIP), the popular online travel site, has been a huge disappointment for investors this week with a year-to-date loss of -26.3% following a 2016 decline of -45.6%. It was good news this week though as the stock spiked higher by +11.7% making it one of the best performing stocks for the week. There were no major headlines driving this move but the higher than average volume would suggest the possibility that one or more large investors is accumulating the stock.

Deere & Company (DE), a massive equipment manufacturer serving the agriculture and construction industries as well as others, reported strong quarterly results with $7.09 billion in revenue and earnings per share of $1.57 which is a 74% increase over the same period last year. These results were ahead of expectations resulting in a jump in its stock price by +7.2% for the week and is now higher year-to-date by 41.2%. Although it has been a great stock for investor in 2017, it is one that can sometimes lag behind for extend periods as it did from 2011 – 2016.

Source: www.yahoo.com/finance

Signet Jewelers (SIG), a retailer of diamond jewelry, reported a very disappointing third quarter and went on to give guidance for the fourth quarter that was below expectations. The results were impacted by weather (hurricanes) and credit-related events. The stock plunged -35.0% for the week. So far in 2017 the stock is down -47.2% following a 2016 loss of -23.8%. The third quarter was the first they have reported with a loss since 2014 but earnings have been slowing and erratic.

Economic Indicator - Reported

The headline number for Durable Goods Orders for October looked rough with a -1.2% decline as compared to both an estimate of +0.4% and a gain of +2.2% for the prior month. When digging a little deeper, the news wasn’t so bad. This month’s decline was primarily the result of a -33% decline in commercial aircraft orders which have been very strong in recent months. Including all components of the economy, including commercial aircraft, Durable Goods Orders are up +8.3% year-over-year.

Excluding the volatile transportation component, orders rose a very solid +0.4% for the month combined with a revision to the prior month’s gain by an additional +0.4%. Helping these numbers are both strong vehicle shipments and production which may still be feeling some hurricane effects.

The index of Leading Indicators, a composite of 10 forward-looking components, came in at the high end of estimates at +1.2% for October boding well for a strong start to the fourth quarter for the economy. A swing in unemployment claims helped this October reading along with strong building permits and persistently low interest rates. Furthermore, September has originally been reported at -0.2% but was revised to a gain of +0.1%.

Consumer Sentiment, reported by the University of Michigan following a survey of 500 households, also came in better than expected at a reading of 98.5. The estimate was for a reading of 98.1 and the prior month’s number was 97.8. This report measures household financial conditions and attitudes toward the economy. The strong October reading was helped by households feeling confident about gains in income and employment and expectations that inflation remains low.

Economic Indicators – Upcoming

There will be two reports on housing this week including New Home Sales which are expected to remain relatively strong but decline from the surge in October that came in with the biggest monthly percentage increase in 28 years. The Housing Price Index is expected to showing continued increases in prices with a +0.4% expected for October and a strong year-over-year gain of +6.2%.

The second reading on third quarter Gross Domestic Product (GDP) will be reported. The first reading showed the economy growing by +3.0% and estimates for this second reading are for a revision higher to +3.3%. Strong consumer spending is expected to have helped the economy’s performance.

Consumer Confidence, another measure of consumer attitudes, is running at 17-year highs. It is expected to remain near those highs for November but off slightly from the month before with an estimated reading of 124.3.

Contact Mark A. Patton :