Last week was holiday-shortened and rather lackluster. Today marks the official end of November and December looks promising, at least historically. Capital IQ reports that since WWII in the month of December the S&P 500 has risen 1.8% on average versus 0.7% for the other months. Such a return would be welcomed considering the tepid performance of the equity markets YTD. On the heels of the Paris terrorist attacks and others around the world, as well as the Russian fighter jet being shot down by Turkey, it is no wonder that some more positive economic data was offset by geopolitical uncertainty. Last week the S&P 500 and the NASDAQ were up 0.04% and 0.44%, respectively, while the Dow Jones Industrial Average finished down 0.14%. Foreign markets fared better than the domestic markets trading up on the week, with the ACWI up 2.7% and the ACWX up 2.2% for the week.
In a relatively uneventful Thanksgiving-shortened week the bond market was fairly quiet. The short end of the Treasury yield curve moved up with expectations of a Fed rate hike in December and the mid to long end of the curve moved down as the Fed has telegraphed subsequent rate hikes will be slow and data dependent. With inflation readings remaining below the 2% target there seems little likelihood of upward pressure on the mid to long term Treasury yield curve. In spite of a second quarter in a row of negative corporate earnings, corporate bond spreads narrowed. For the week, the benchmark 10-year US Treasury bond yield dropped 4 bps on the week ending on Friday at 2.22%. For the same period, the 2-year Treasury yield was up at tick to 0.92%, while the 5-year yield was down a tick to 1.65%. The 20 and 30-year Treasury yields were also down on the week closing at 2.64% and 3.00%, respectively.
The USD continues to run strong against the EUR and other major currencies as the Fed continues to lean towards raising interest rates and other central banks talk about further easing. For the week, the EUR/USD closed at 1.059 up 1.7% over the past two weeks. Against
a broader basket of currencies the dollar was up as well with the DXY closing at 100.08, up 1.2% over the past two weeks.
The holiday shortened week had some news, but most everyone is waiting for the employment numbers to be announced this week. 1) Tensions rose after Turkey shot down a Russian fighter jet that had violated Turkey’s airspace. The fallout was less than expected, but creates additional geopolitical fragility. 2) Market PMI manufacturing for October was reported and disappointed with the lowest reading since October 2013. The November flash number for manufacturing was lower than October and lower than the November expectation. 3) The Chicago National Activity index remained below zero and the three month average number declined, indicating year ahead inflation should be subdued. 4) The November flash numbers for Eurozone PMI (manufacturing and services) were better than expected. 5) Real Q3 GDP was revised upward from 1.5% to 2.1% due to an inventory adjustment. The Case-Shiller home price index rose 5.5% y/y. In the meantime, consumer confidence posted a sharp and unexpected decline from 99.1 in October to 90.4 in November. 6) Core capital goods orders were reported up 1.3% (well ahead of expectations), and personal income was up as expected, but consumer spending was down, consistent with the downward adjustment in October’s Michigan consumer sentiment number.
With 98% of companies in the S&P 500 reporting earnings to date for Q3 2015, 74% have reported earnings above the mean estimate and 45% have reported sales above the mean estimate. So far for Q3 the blended y/y earnings decline has been -1.3%, marking the first back-to-back quarters of earnings declines since 2009. At this point 81 companies have issued negative EPS guidance for Q4 and 26 companies have issued positive EPS guidance. The 12-month forward P/E ratio for the S&P 500 is 16.4 based on a projected forward 12-month EPS estimate of $127.14. The S&P 500 forward P/E multiple is above the five-year average and
10-year average of 14.1.
Oil prices remained weak again last week with WTI closing $41.77 and Brent at $44.86. Brent closed at $47.42 down from over $48 the week before. Lower oil prices across the country means more money in consumers’ pockets, but we will have to wait until the end of December to see if any of that money translates to retail revenue or healthcare payments. Over-supply is the reason for the downward pressure on prices and slow global growth doesn’t offer any immediate change to the situation.
Monday: The Chicago Purchasing Managers index for November is reported; The IMF will announce its decision to include the Chinese Yuan in the reserve currency basket.
Tuesday: The ISM manufacturing Index for November is reported; Big US automakers report vehicle sales for November – expectations are that they will decline from the two previous months, but remain robust.
Wednesday: The ADP employment report for November is released; The Fed Beige Book of regional economic activity is released; Fed Chair Yellen speaks in front of the Economic Club of Washington just two weeks before the highly anticipated December Fed meeting.
Thursday: Fed Chair Yellen testifies before the Joint Economic Committee of Congress on the economic outlook; Fed vice Chair Stanley Fischer speaks at a conference; the ECB meets and may announce further economic stimulus; Challenger, Gray, and Christmas issue November job-cut announcements.
Friday: The highly anticipated non-farm payrolls are reported for November and are expected to come in at 200,000. Also reported is the jobless number is expected to come in at 5%.