Your Weekly Update for Monday, November 11, 2019
Today is a federal holiday in honor of Veterans Day. The bond market is closed, but the stock, futures, and currency markets are all open.Ā Thank you to all veterans for your service.
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Have a great week!
Mike Elerath
CERTIFIED FINANCIAL PLANNERTM
NATIONAL SOCIAL SECURITY ADVISOR
Bill Roller
CHARTERED FINANCIAL ANALYST
CERTIFIED FINANCIAL PLANNERTM
CHARTERED MARKET TECHNICIAN
NMLS #107972
Summary
Markets were all up last week. The Dow Jones Industrial Average rose 1.22% to 27,681.24. The S&P500 ended up 0.85% to 3,093.08 while the Nasdaq Composite finished up 1.06% to 8,475.31.Ā The annual yield on the 30-year Treasury rose 20.5 Ā basis points to 2.417%.
In a light week for economic data, ISM non-manufacturing sentiment strengthened beyond expectations, while labor data was mixed, but remained generally positive.
Global equity markets rose in value during the week, with slightly better-than-expected economic results and again high hopes for an early phase trade deal. Bonds experienced a rougher week with negative returns, as rates ticked higher along with stronger growth expectations. Commodities were mixed, but generally higher, led by stronger prices for crude oil and natural gas in the energy sector.
Economic Notes
(+) The ISM non-manufacturing index for October rose by 2.1 points to 54.7, rebounding from a weak patch and exceeding expectations for a milder bump to 53.5. Under the hood, new orders, business activity, supplier deliveries, and employment all moved higherāmore solidly into expansionary territory. On the downside, new export orders fell a few points to a neutral 50 reading, while prices paid declined several points to a still-expanding 57 level.
(0) The September trade balance tightened in September by -$2.5 bil. to a deficit of -$52.5 bil., which was just wider than the -$52.4 bil. level expected. Imports declined by nearly -2%, led by a -5% drop in petroleum and -2% in other areasāparticularly electronics, toys and sporting goods. Exports fell by almost -1% for the month, with non-petroleum declines leading the way (soybeans primarily, which have been in the mix of the U.S.-China trade conflict), with petroleum exports barely changed. Overall, trade volumes are down over -2% from a year ago, indicative of the impact of the recent trade disputes. However, one interesting item of note in this report was that U.S. oil exports exceeded imports for the first timeāa byproduct of the multi-year fracking revolution that has dramatically adjusted global petroleum supply dynamics.
(+/0) The preliminary Univ. of Michigan consumer sentiment index for November ticked up a bit, by 0.2 of a point to 95.7, beating expectations calling for no change at 95.5. The assessment of present conditions fell by over -2 points, while expectations for the future rose by nearly 2āa closing of the gap seen as a positive development. From an inflation standpoint, expectations for the coming year were unchanged at 2.5%, while those for the next 5-10 years ticked up by a tenth to 2.4%.
(-/0) The government JOLTS job openings report for September fell by -277k jobs to 7.024 mil., which was weaker than the forecasted 7.063 mil. positions. The underlying statistics were mixed, with job openings falling by -0.2% to 4.4%, hiring flat at 3.9%, quits falling by a tenth to 2.3%, while the rate of layoffs rose a tenth to 1.3%. The metric continues to report decent results, albeit at a more tempered pace than prior periods.
(0) Nonfarm productivity for Q3 surprisingly declined by an annualized -0.3%, which ran against expectations for an increase of 0.9%, and brought the year-over-year rate down nearly a half-percent to 1.4%. On the other hand, related unit labor costs rose by an annualized 3.6% rate in the quarter, far surpassing the 2.2% growth rate expected. This pushed the year-over-year rate to 3.1%, which is the highest level in over five years.
(0) Initial jobless claims for the Nov. 2 ending week fell by -8k to 211k, below forecasts calling for 215k. Continuing claims for the Oct. 26 week ticked down by -3k to 1.689 mil., just above expectations for a further decline to 1.682 mil. No anomalies were reported, as the largest claim activity was focused on the larger states. Levels remain generally unchanged from recent moving averages, and point to low layoffs and a strong labor market.
(0) The Fedās Senior Loan Officer Opinion Survey is a more obscure release, but offers interesting information about tightness or looseness in lending markets, as reported by U.S. banks. The October edition, covering the third quarter, showed that conditions were mixed. Standards for commercial and industrial loans moved modestly tighter in Q3 compared to Q2, including those for larger firms, which was coupled with nearly a quarter of larger banks reporting weaker demandāthe largest share in a decade. Commercial real estate lending standards tightened, which appeared to be driven by tighter conditions for construction and land development at several larger banks; it appeared demand for such loans weakened modestly. Residential real estate loan standards were little changed in the period, while demand strengthened, with help from lower interest rates during Q3. Standards for consumer installment loans were little changed, although a āmoderateā share of banks did tighten for credit cards. Interestingly, one piece of solid news is that demand for auto loans rose, also in keeping with lower interest rates during the quarter.
Question of the Week: Which segments of the equity market face the most uncertainty prior to the 2020 election?
This question is always a wildcard so far in advance, but it will likely depend on the ultimate Democratic front-runner. With the slippage of Joe Biden in the polls in favor of a rising Elizabeth Warren, there are already a few hot button issues that have affected sentiment. Biden has been depicted as a āworking-classā advocate, more aligned to the traditional Democratic policy platform, while Warrenās views have tilted further towards the left, nearly to the degree of candidate Bernie Sanders in 2016. This is especially true in the consumer protection arena, where she has served in unique governmental roles.
One of the largest areas of focus is health care. The promotion of āMedicare for Allā-type plan or other discussion about a single-payer solution has increased volatility in the segment. It comes down to who the āwinnersā and ālosersā might be if the current complex medical system is changed, and how that affects profitability (or even the continued viability of business models in some sub-sectors, such as drug distribution). For blue chip pharma companies, and even smaller biotech manufacturers, the primary focus is their drug pipeline and revenues, and, specifically, how changes to the system could trim payments to manufacturers (as is already seen in other parts of the world).
The classic argument made by big pharma is that the wide profit margins on new products are required to fund research and development for new drugs, and, without those proceeds, the new innovations canāt happen. This debate has been in place for decades, with little having changed, other than some of the more egregious drug price increases in recent years having been pulled back in light of the political and public backlash. The current litigation regarding Opioids and who is to blame for their over-prescription is another to-be-determined factor that could take on more political importance. (A variety of municipalities are already involved in potential litigation with Opioid makers and distributors.) While it could seem odd to blame manufacturers of a drug for its misuse, the growing pervasiveness of abuse and social and economic effects may raise the statute of this as a political issue.
Financial stocks are another target of possible re-regulation. This had been done once, by Dodd-Frank legislation following the financial crisis, so there appears to be less to do here. However, Warrenās background as a consumer advocate could threaten a strengthening of such protections, which may end up being more burdensome for banks on the compliance side, or threaten profits for firms, such as those involved in credit cards and other consumer lendingānotably those seen as predatory to lower-income borrowers. In an appeal to younger voters, possible solutions to the growing student loan problem, such as partial forgiveness, interest rate caps, or other regulations, could also be considered anti-lender.
Technology and communications services have also been targets, interestingly from both political parties. Privacy concerns with larger technology and social media firms have pushed some to call for a breakup of these companies (to erode their oligopoly-like status), or at least EU-style regulations on the use of personal data (GDPR). This has seemed to pick up steam in the wake of the growing number of large data breaches. While it lies the shadows, data has become big business, and represents a financial commodity bought and sold for marketing purposes, so is a monetized component in company earnings. Restricting its use could naturally affect these firms negatively. Peripheral technology companies such as Amazon, which is technically in the consumer sector, could face growing scrutiny for accusations of anti-competitive practices for dealings with smaller competitors on its platform. This is a more difficult argument compared to times past, as this has recently resulted in lower consumer prices, as opposed to higher.
In other sectors, energy and materials could face greater examination under a Democratic administration, and certainly tighter environment controlsāin contrast to those loosened in recent years under the Trump administration. Tighter restrictions on commodity extraction and production, such as pipelines and fracking, typically mean less flexibility when responding to market changes, so greater volatility in profits.
More broadly, a new administration and change in composition toward Democratic control could ratchet up the possibility of rolling back recent tax law changes. Itās been argued (including by some in corporate America), that tax cuts were taken a little too far, so at least a partial repeal and movement in tax rates upward a bit would put a dent in corporate earnings immediately across the board. Of course, a new administration could also affect the pace and rhetoric of the current U.S.-China trade/tariff debate for better or worse. This affects a variety of sectors, including industrials and consumer goods, among others indirectly, due to intertwined supply chain linkages. While an issue with long-term ramifications, markets do tend to penalize the addition of uncertainty but also reward the removal of uncertainty in the near term.
As you can see, none of these issues are new, and have been raised in many of the Presidential elections of the recent decades. If they were easy to solve, they probably would have been already.
Market Notes
| Period ending 11/8/2019 | 1 Week (%) | YTD (%) |
| DJIA | 1.37 | 21.15 |
| S&P 500 | 0.93 | 25.52 |
| Russell 2000 | 0.63 | 19.96 |
| MSCI-EAFE | 0.53 | 18.15 |
| MSCI-EM | 1.49 | 10.26 |
| BBgBarc U.S. Aggregate | -0.87 | 7.74 |
| U.S. Treasury Yields | 3 Mo. | 2 Yr. | 5 Yr. | 10 Yr. | 30 Yr. |
| 12/31/2018 | 2.45 | 2.48 | 2.51 | 2.69 | 3.02 |
| 11/1/2019 | 1.52 | 1.56 | 1.55 | 1.73 | 2.21 |
| 11/8/2019 | 1.55 | 1.68 | 1.74 | 1.94 | 2.43 |
U.S. stocks generally fared well during the week with discussions about rolling back some tariffs as a part of the proposed āphase 1ā trade deal, as quoted by an administration official. This included the likely continuation of a waiver for communications and tech firms for associations with controversial Chinese telecom Huawei Technologies. Several stock indexes, including the Dow, S&P and Nasdaq all moved into record territory yet again. As has been the case over much of the past year, market sentiment has wavered back and forth (almost by the hour) based on rumors of various deal components.
It is difficult to assess the level of trade deal impact that have been baked into equity prices at this point. Although, it appears that the probability of āsomeā deal in a final form is in the base case for many prognosticators, as opposed to the complete breakdown of talk, although that remains in the realm of possible outcomes. The lower likelihood is due to the political will for continued economic expansion at least through the 2020 election period, as weāve discussed previously.
By sector, results have been increasingly divergent and based on various earnings results in recent weeks. However, last week, all segments gained ground, led by financials, industrials and energy. Utilities lost the most ground, down nearly -4% as rich valuations were coupled with rising interest rates and investor preferences for risk. Real estate also lagged, due to flows away from higher-yielding defensive assets.
Foreign developed market stocks fared similarly to U.S. names in local terms, while lagging a bit when translated for a stronger dollar. European firms have fared decently, with lower valuations already in a world starved for cheaper assets, and a ratio of roughly half of firms beating their earnings estimates for the past quarter (trailing the roughly three-quarters in the U.S. that have done so, per FactSet). The recent focus now has been on the German economy, which is export-heavy, and thus a gauge of the direct impact of slowing global economic growth and trade tensions. Itās bordering on recession, with negative GDP growth and a pervasive contractionary manufacturing ISM. Emerging markets fared a bit better, with less of a currency impact. Gains in China and other Asian nations were fueled by stronger-than-expected Chinese economic data, but also improved trade deal hopes. Brazil struggled due to weakness in the real, stemming from offshore oil drilling rights auctions that brought less interest than anticipated.
U.S. bonds pulled back significantly for the week, along the lines of -1% or more for broader indexes. Higher yields came with hopes of a trade deal, and supposed positive impact on economic growth. In fact, the 10-year treasury reached over 1.9%, the highest rate since early summer. Bank loans, however, benefitted from the path upward in rates, ending as the only segment with significant gains for the week. Foreign bonds suffered a similar fate, exacerbated in developed markets by a stronger dollar, which pushed index results down over -2%. Emerging market debt fared slightly better, but still ended the week with losses.
Commodities were again mixed, with a stronger dollar serving as a headwind. While industrial metals were unchanged, agriculture lost ground, as did precious metals, along with a stronger risk appetite in financial markets. Energy gained, helped by continued increases in natural gas, due to expected colder weather in coming weeks, in addition to the price of crude oil gaining nearly 2% just over $57/barrel. From a broader level, reports continue to surface showing supply growth in a number of countries for next year, such as Norway and Brazil; at the same time, risks of a global demand slump persist. The combination of those two factors are generally negative for oil price prospects, absent any policy activity by OPEC to continue to contain production and keep prices within an acceptable range.
Mortgage Rate
āAfter a year-long slide, mortgage rates hit a cycle low in September 2019 and have risen in six out of the last nine weeks due to modestly better economic data and trade related optimism,ā said Sam Khater, Freddie Macās Chief Economist. āThe improvement in sentiment has been one of the main drivers behind the surge in equity prices and will provide a halo effect to consumer spending heading into the important holiday shopping season.ā
The 30-year fixed-rate mortgageĀ averaged 3.69% with an average 0.5 point for the week ending November 7, 2019, down from last week when it averaged 3.78%. A year ago at this time, the 30-year FRM averaged 4.94%.
The 15-year fixed-rate mortgageĀ averaged 3.13% with an average 0.4 point, down from last week when it averaged 3.19%. A year ago at this time, the 15-year FRM averaged 4.33%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgageĀ (ARM) averaged 3.39% with an average 0.3 point, down from last week when it averaged 3.43%. A year ago at this time, the 5-year ARM averaged 4.14%.
Average commitment rates should be reported along with average fees and points to reflect the total upfront cost of obtaining the mortgage. Visit the following link for theĀ Definitions. Borrowers may still pay closing costs which are not included in the survey.
Through our relationship with Prestige Home Mortgage in Vancouver, Washington we originate residential and reverse mortgages. Check us out at https://beaconrrwa.com and our affiliated websites atĀ https://reverse-mortgages.us and https://socialsecurityquestionsanswered4u.com.
Sources: Ryan Long, CFA, FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, PIMCO, Standard & Poorās, StockCharts.com, The Conference Board, Thomson Reuters, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.
Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.