Week Ending 11/18/2017

Summary

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

Notable Market Headlines

U.S. stocks closed the week mixed with large stocks down -0.1%. It’s been about 10 days since they hit a record high with them off -0.5%. The NASDAQ Composite, a benchmark for technology stocks, did hit another record high on Thursday and closed the week higher by +0.5%. Generally strong earnings reports and a strong economy are being credited for the market’s overall strength. Year-to-date large stocks are higher by +15.4% and the NASDAQ has gained +26.2%.

Small U.S. stocks resumed their strength this week on optimism that a tax bill may get passed that could lower corporate tax rates to the lowest level in decades. It is believed that these lower tax rates would benefit small companies more so that large resulting in U.S. small stocks doing far better than large stocks for the week with a gain of +1.3%. The so-called Trump Rally that began just over a year ago initially favored small stocks, as illustrated in the accompanying graph, but the rally faded as investors questioned the likelihood that tax reform would become reality. We’ll see if the recent optimism will persist.

Source: www.yahoo.com/finance

International stocks were also mixed with developed markets down -0.5%. Whereas U.S. large stocks are off just -0.5% since hitting record highs a couple of weeks ago, European markets are off -2.5% with Italy and Spain’s markets leading the declines. In spite of this recent underperformance, these markets all remain sharply higher for the year.

In spite of the decline in developed markets, international emerging markets gained +1.1%. The strength was not across all markets as Latin American markets, such as Brazil, were strong while the very large China market declined -1.3%. Given the +33.7% year-to-date gain for emerging markets, there is talk that they have rallied too far too fast. It’s worth noting though that emerging market remain -16% off their 2007 highs and lagged behind U.S. stocks, as an example, for multiple years.

Gold rallied +1.4% for the week, helped by the larger than expected rise in Producer Prices. Gold has had a good 2017 with a gain of +12.1% but remains more than -33% below its 2011 highs. Commodities were lower by -0.8%. The price of oil contributed to this drop in spite of a strong rally on Friday. Real estate slipped -0.2% for the week after a sharp increase the prior week.

The bond markets gained ground for the week up +0.3%. The performance of bonds year-to-date has been very different depending on the market as illustrated in the accompanying graph. For example, while U.S. Government Bonds are higher by +1.3% in 2017, international government bonds have surged nearly +10%.

Source: Standard & Poor’s Compustat

Winners and Losers by Sector

Source: S&P Compustat

Stock Highlights

General Electric (GE) is suffering through a CEO change, restructuring, and a board shakeup. The company provided an extensive investor update on November 13th that included a much anticipated announcement that the dividend is being cut in half. This disappointing, and somewhat unclear, outlook provided by management, combined with a disappointing earnings report released a few weeks ago, has not been well received by Wall Street. This stock dropped -11.1% for the week, or -$19.7 billion, and is now down -42.4% for the year. Furthermore, the stock is off -70% from its 2000 high 17 years ago.

Walmart (WMT) stock surged this week on strong quarterly results from this world’s largest retailer. The company reported revenue of $123.2 billion, up +4.2% compared to the year before, and earnings per share of $1.00. Comparable-store sales increased by +2.8% in the U.S. and also gained in 10 of their 11 international markets. The big excitement was a 50% surge in online sales. Walmart’s stock hit a new record high on this news and closed the week up +7.2%.

Foot Locker (FL), a retailer of shoes and apparel, reported sales and earnings ahead of expectations resulting in its stock surging +34.5% for the week. Surprising though is the fact that total revenue and same-store sales both declined for the quarter but just less than had been expected. Given the pricing pressure and lower profit margins, some investors are sure to remain skeptical that the company can turnaround its longer-term struggles. Year-to-date, in spite of this week’s surge, the stock remains down -42.4%.

NetApp, Inc. (NTAP), a provider of software and systems to manage and store customer data, reporter quarterly earnings of $0.81 per share as compared to the estimate of $0.69 on an increase in revenue compared to last year’s same quarter. This stock jumped +14.2% this week and is higher by +50.1% year-to-date but, as the accompanying graph shows, it has been a wild ride for long-term investors.

Source: www.yahoo.com/finance

Economic Indicator - Reported

Household debt reaches record level of $12.955 trillion but is only 66% of GDP as compared to 87% of GDP in early 2009. Source. Given the strong economy and very low unemployment, this is a relatively normal experience. There is some concern when digging deeper into the data including an increase in default rates for higher-risk car loans and the large increase in student debt and related defaults.

The Producer Price Index (PPI), a measure of wholesale inflation, increased by +0.4% as compared to the estimate of a gain of just +0.1% and higher by +2.8% for the past 12 months. Even when excluding the more volatile food and energy sectors, the PPI still gained +0.4% as compared to the estimate of +0.2%. This is a welcomed increase as the Federal Reserve has been stymied by persistent low inflation.

Consumer (retail) prices, as measured by the Consumer Price Index (CPI), remained low and came in as estimated at +0.1% overall and +0.2% when excluding food and energy. There was weakness in vehicle prices and prescription drugs while pricing has stabilized for wireless services after being down sharply. The higher inflation for wholesale prices, the PPI, suggest that higher prices could be in the pipeline for consumer prices.

Industrial production jumped much more than expected with a gain of +0.9% in October. This was much better than the estimate of +0.5% and also a sharp improvement over the prior month’s +0.3% gain. Motor vehicles have been a strong component of the report helped by auto sales following the two hurricanes.

Economic Indicators – Upcoming

It will be a relatively quiet week for economic data.

Durable Goods Orders, a measure of new orders placed with domestic manufacturers thus providing an indication of how busy factories will be in the coming months, was higher by +2.2% in October and expected to continue strong in November with an estimated gain of +0.5%.

Other economic reports will include Existing Home Sales, expected to be running at 5.425 million annually, slightly higher than the month before, and Consumer Sentiment expected to remain strong.

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