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Week Ending 12/9/2017

Summary

  • The U.S. economy added 228,000 jobs indicating continued economic strength
  • Large U.S. stocks reached another record high but small stocks lagged behind
  • Retailers have had a strong start to the shopping season resulting in higher stock prices

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

Notable Market Headlines

U.S. stocks started the week strong following the Senate vote passing its version of the tax bill but optimism quickly waned. For most of the week stocks tended to drift lower but managed to gain some strength at the end of the week following a strong employment report. At the close of the week large U.S. stocks were higher by +0.4% which was enough to push them into record territory once again. Small U.S. stocks diverged from large stocks and instead closed lower by -1.1%. Year-to-date large stocks are higher by +18.8% and small stocks by +12.3%.

Although large U.S. stocks hit a record high, there were clear winners and losers amongst the various sectors. Technology stocks, which have been the hands-down winners for the year with gains of +34.8% year-to-date, were unchanged for the week. This week’s performance comes as somewhat welcome news following a fairly sharp selloff during the prior week or so. The winning sectors continued to be financials gaining +0.9% and industrials higher by +1.0%. It is widely believed that the passing of tax reform would favor big banks and manufacturing companies with less benefit to large tech companies.

The accompany graph illustrates how technology stocks experienced a fairly quick selloff a couple of weeks ago while financials and industrials gained ground. The topic being widely discussed is whether or not this performance will turn into a longer-term trend or if technology will resume its leading position in the market.

Source:www.Yahoo.com/finance symbols IYW, IYF, IYJ

International stocks were little changed for the week with developed country stocks flat and emerging markets gaining +0.2%. The small gain in emerging markets was also welcomed by investors given the sharp -3.9% selloff the prior week. One emerging market doing particularly well this week was India gaining +2.3% fueled by hopes the ruling party would win elections starting over the weekend. Year-to-date developed market stocks are up +21.0% and emerging markets by +31.2%.

Non-traditional asset classes did not help a portfolio’s performance this week with losses across the board. Gold was down the most with a loss of -2.6%. It remains higher year-to-date by +8.1% but is off its early September high by -7.5%. Gold is often viewed as both a safe haven for investors and a proxy for future inflation. The trend the past few months would suggest investors have few concerns today.

Commodity prices retreated for the week losing -2.1% and falling back into negative territory year-to-date. Commodity prices peaked about a month ago following multiple months of strength that started mid-year. Real estate stocks slipped -0.6% and are not up less than a percent for the year.

Bonds were little changed for the week but did see a fair amount of movement during the week. Prices moved higher, and yields lower, during the first half of the week but then fell late in the week following the employment report showing slow wage growth.

Winners and Losers by Sector

Source: S&P Compustat

Stock Highlights

General Electric (GE), the struggling business conglomerate, announced it would cut 12,000 jobs as is revamps is power unit. This is a continuation of a strong of bad news from the company as last reported in this blog a few weeks ago. The stock fell another -1.0% for the week and is down -44.0% year-to-date. The stock is back to trading where it was 20 years ago when it was once on a meteoric climb during the late ‘90s. In spite of this terrible 20 last years, the accompany graph shows that during the last 50 years General Electric has handedly outperformed the S&P 500.

Source: www.Yahoo.com/finance

The battle in the health care arena is heating up following CVS’s planned $66 billion acquisition of Aetna reported more than a month ago. This week UnitedHealth (UNH) announced a $4.9 billion deal to by the medical unit of DaVita, Inc. (DVA). UnitedHealth will combine this acquired unit with its existing OptumCare unit to expand its ambulatory services. DaVita’s stocks jumped +10.8% on the news but is only higher by +5.5% for the year.

Brown Forman (BF.B), massive spirits and wines business including brands such as Jack Daniel’s, Sonoma-Cutrer wines and more, reported better than expected earnings of $0.62 per share, a 23% increase over last year, on sales of $914 million. Furthermore, the company gave guidance for the coming quarters that was better than previously thought. Brown Forman’s stock gained +9.5% on the news and is up a very impressive +48.0% for the year.

Many retail stocks have had a nice run since the start of the holiday season as the accompany table highlights. The shopping season has gotten off to a good resulting in investor optimism. According to The Statistical Portal, holiday sales are estimated to grow by about +3.8% in 2017 as compared to the prior year.

Source: Compustat

One retail related stock not participating in the recent rally is toymaker Mattel (MAT). It was reported a few weeks ago that Hasbro (HAS) may be interested in acquiring Mattel with Mattel’s stock jumping on the news. Since the reported rumor, Mattel’s stock has given back nearly all of those gains including a drop this week of -12.9% leaving it lower year-to-date by -45.4%. Mattel faces stiff competition and changing consumer habits resulting in its revenue peaking in 2013 and have since declined by more than $1 billion annually.

Economic Indicator - Reported

The employment report for November showed the U.S. economy adding 228,000 jobs beating the consensus estimate of 190,000. Leading sectors were manufacturing, constructions, and professional services. No doubt the labor market is heating up with this month being the 84th consecutive month of reported gains. The unemployment rate came in as expected at 4.1% which is the lowest level in 17 years.

The average workweek inched higher by 1 tenth to 34.5 hours for private sector employees. This combined with the low availability of workers has NOT yet translated into significantly higher wages with earnings up +0.2% for the month and +2.5% year-over-year.

Factory orders fell -0.1% in October which was significantly better than the consensus estimate of -0.4%. This decline is due to a much anticipated sharp drop in aircraft orders while the rest of the data is relatively strong a suggests a relatively strong manufacturing sector so far in the fourth quarter.

Consumer Sentiment, as measured by the University of Michigan, came in below expectations with a reading of 96.8. This number is still at the high end of the long-term trends but was dragged down by a decline in economic confidence of Democrats due to their concerns about the impact of the proposed tax changes.

Economic Indicators – Upcoming

Investors will get two reads on inflation this week starting with the Produce Price Index (PPI), a measure of wholesale inflation. Economists estimate that prices rose by +0.3% in November resulting in a moderate +2.3% for the past year when excluding volatile food and energy prices. The Consumer Price Index (CPI), a retail inflation measure, will also be reported with estimates of just +0.2% for November and +1.8% year-over-year when excluding food and energy. Weak vehicle prices have been among the segments weighing down numbers.

Retail sales for November are expected to have increased by +0.3% in spite of what is expected to have been a weak month for auto sales. Special attention will be paid to department store sales and nonstore data to get an idea of the success of Black Friday and Cyber Monday.

Industrial production, a measure of the manufacturing, mining, and utilities industries, is expected to have increased by +0.3% in November. This number has been volatile due to hurricane effects and was very strong last month. The capacity utilization rate is expected to reach 77.2% suggesting the economy has more room to grow.

Contact Mark A. Patton :