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02 December, 2017 Market Commentary

Market Commentary - Week 48


Week Ending 12/2/2017

Summary

  • Stocks in the U.S. were higher while international markets fell
  • Leading U.S. technology stocks experienced a significant selloff
  • The economy remains strong with third quarter GDP revised higher to +3.3%

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

Notable Market Headlines

It was a volatile and mixed week for investors. U.S. stocks, overall, continued to gain ground but there was a sharp reversal in leadership with those stocks that had been winners tended to suffer while the year’s losers tended to gain. Though U.S. stocks gained, international stocks lost ground with the year’s strongest markets around the world suffering the biggest loses.

Large U.S. stocks posted the biggest gains this week with an impressive +1.6% gain putting the year-to-date number at +18.3%. Small U.S. stocks also rallied +1.4% for the week and are now higher by +13.5% for the year. Although neither closed the week at all-time highs both did reach new record levels mid-week.

The week’s gains in both large and small U.S. stocks does not tell the whole story for investors. The Dow Jones Industrial Average had a stellar week adding 673 points, or +2.8%, to close above 24,000 for the first time. The last day of the week though gave investors a little scare with the Dow down -350 points less than midway into the day. The quick drop was apparently triggered by the announcement that former national security advisor Mike Flynn pleaded guilty to lying to the FBI. This was then followed by hope that the Senate may pass its version of the tax overhaul and the market recovered with the Dow closing down just -40 points for the day.

As noted earlier, this was a week when many of the year’s winners were losers for the week. This was most evident with technology stocks that lost -2.2% for the week in spite of both large and small U.S. stocks overall moving higher. The losses for technology stocks were the worst on Wednesday when some of the biggest names got hit hard (see accompanying table) while the overall market gained ground.

Source: S&P Compustat

There was no news in particular that triggered this technology selloff. One explanation is that investors may be shifting away from these growth oriented stocks and rotating into more value oriented stocks such as financials that gained +3.4% for the week. The other group with a notable gain was energy stocks rallying +2.7% but are still lower year-to-date by -8.0%.

International stocks were lower across the board with emerging markets experiencing a relatively sharp selloff of -3.9% for the week. A couple of emerging markets getting hit hard were China, down -4.4%, and Brazil’s market off -4.2%. In spite of this selloff, year-to-date these markets remain higher by +30.9%. Furthermore, as noted in this blog last week, the odds that the year closes strong for emerging markets is high based upon history. Developed markets faired the week better with a loss of just -0.7%.

Oil prices remain near the year’s highs but closed this week slightly lower. As the accompanying graph illustrates, oil has been on a strong run since June that has been fueled by a strong economy and some expectations that OPEC will reduce output.

Source: http://markets.businessinsider.com/commodities/historical-prices/oil-price/USD/30.12.2016_2.12.2017?type=WTI

All of the non-traditional investments fell fractionally for the week. Commodities were lower by -0.4% impacted by the drop in the price oil. Gold was off -0.6% and Real Estate slipped -0.2%. Gold remains the best performer of this group year-to-date with a gain of +10.9%.

Bond prices moved lower by -0.4% for the week resulting in a move higher in interest rates. The expectation remains high that the Federal Reserve will increase interest rates this month.

Winners and Losers by Sector

Source: S&P Compustat

Stock Highlights

As discussed in the above commentary, last week was one where many of the year’s winners turned into losers. That was the case for the entire month of November as well. Many of the worst performing stocks, most notably many retail stocks, performed very well in November (see the accompanying table). Reversals such as this are common with the big question being whether or not this is just another shorter-term reversal or the beginning of a longer-term trend where retail stocks may make a meaningful recovery…time will tell.

Source: S&P Compustat

L Brands (LB), an operator of specialty retail stores including Victoria’s Secret and Bath Body Works, also one of November’s best performers, was the week’s best performer with a surge of +15.5%. The company got off to a good holiday shopping start reporting sales of $1.267 billion for the four weeks ending November 25th which was a 2% increase over the same period last year. This is a turnaround for the company with sales year-to-date lower by 3%.

Kroger (KR), a $118 billion grocer, reported better than expected quarterly results suggesting the company is successfully dealing with competition from the likes of Amazon. Quarterly sales came in at $27.75 billion, up 4.5%, and earnings were $0.44 per share or $0.04 better than Wall Street estimates. The stock jumped on this report by +11.7% but remains lower for the year by -25.6%. it is yet to be seen if the company can sustain its strength but this week was certainly welcomed relief for investors.

Audodesk (ADSK), a software and services business, reported quarterly results that were ahead of expectations and reaffirmed sales and earnings guidance for the next quarter and year that were in line with estimates. This was all good news but the company announced a restructuring that was not well received by investors. This restructuring will result in 1,150 job cuts, or about 13% of its workforce, as well as one-time costs in the fourth quarter and 2018. This stock dropped -17.3% for the week but remains higher year-to-date by +44.7%.

Economic Indicator - Reported

New home sales surged in October, far outpacing economists’ estimates, to an annual rate of 685,000 homes. This was an increase of +6.2% for the month and brings the 12-month gain to an impressive +18.7%. Entry-level buyers of lower priced homes are driving much of this gain which is expected assuming builders continue to bring inventory to the market.

Consumer Confidence soared to a new 17-year high far surpassing economist expectations. The reading came in at 129.5 as compared to an estimate of 124.5. A strong jobs market and strong stock market are helping fuel this confidence.

Housing Prices continued to increase with the S&P Corelogic Case-Shiller HPI showing a gain of +0.5% for September. This was slightly ahead of estimates and puts the year-over-year increase at +6.2%. Prices were higher in all 20 major cities tracked with Atlanta, San Francisco, and Las Vegas leading the country.

The second reading on third quarter Gross Domestic Product (GDP) came in at +3.3% which was better than originally reported by +0.3% but in line with estimates. It was expected that consumer spending was going to be the driver for a better quarter but instead it was nonresidential investment and inventory growth that helped.

Economic Indicators – Upcoming

The November employment report is expected to show the economy adding 185,000 and the unemployment rate holding steady at 4.1%. This would be a strong month but is below the prior month’s 261,000 jobs added that was driven by a snapback related to Hurricane Harvey. Hourly earnings are estimated to rise by +0.3% for a year-over-year gain of +2.6%.

Factory orders are estimated to have dropped for October by -0.4%. The prior months, including September’s gain of +1.4%, have been strong driven in large part by aircraft orders. Outside of a normalization in these orders, overall factory orders are expected to be relatively strong and be in line with expectations of a strong manufacturing sector in the fourth quarter.

Consumer Sentiment, as measured by the University of Michigan, is expected to remain at high levels for the current reading.

Contact Mark A. Patton :