Week Ending 12/16/2017

Summary

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

Notable Market Headlines

It was one of the quieter weeks for investors as nearly every major asset class moved higher but none moved too much. This may come as a bit surprising to some given that the Federal Reserve raised its key lending rate by 0.25%. Interest rate hikes are generally viewed as a negative for stocks as it pushes the yields on bonds higher making them more competitive with stocks. This week’s Fed’s move was widely anticipated though and resulted in little investor reaction.

Large U.S. stocks gained +0.4% to close at another record high.Technology stocks resumed their leading role and topped the performance of all other sectors this week with gains of +1.7%. These tech stock gains this week pushed the NASDAQ Composite, which had been lagging behind, to a new record high as well. Among the factors continuing to broadly fuel investor confidence is a wide range of strong economic data in the U.S. and abroad. Year-to-date large U.S. stocks are higher by +19.2%, tech stocks are up +37.1%, and the NASDAQ has gained +28.9%.

Small U.S. stocks were higher by +0.5% this week but continue lag behind large U.S. stocks year-to-date with gains of +12.9%. Although they are lagging behind this week’s gains were enough to push them back to record territory. It is widely believed that the tax bill that is expected to pass will be more beneficial to small stocks than larger which could help small stocks close the performance gap with large stocks.

International stocks gained ground as well with developed country stocks up +0.2%. This gain does mask though the differences in returns for the week from the major two major developed country regions as Eurozone stocks were down -1.1% while the Australian markets gained +2.1%. It has been the exact opposite story for these two regions year-to-date, as the accompanying graph illustrates, with Eurozone stocks up +24.9% and Australian markets up only +14.4%.

International emerging markets moved higher by +0.5% and are up +31.9% year-to-date. This group remains the best performing in 2017 but is off recent highs by -3.4%.

Real estate and gold both posted gains for the week of +0.6%. Real estate stocks have been getting some attention due to deals in the industry although this news hasn’t had a meaningful impact on the 2017 trend. Year-to-date real estate is up just +1.3%. Gold’s gain comes following a fairly steady decline since early September but remains higher year-to-date by +8.7%.

Commodities were the only group to decline this week with a loss of just -0.1%. Oil, among the commodities group, was little changed on the week as investors digest two conflicting headlines: 1.) an outage of a major pipeline in the North Sea putting upward pressure on prices and 2.) increased production in the U.S. pushing oil inventories to the highest levels in a year.

Bond prices inched higher, up +0.2% for the week, resulting in slightly lower yields. This is contrary to what would be expected longer term given the Federal Reserve’s interest rate hike this week and more expected in 2018.

Winners and Losers by Sector

Source: S&P Compustat

Stock Highlights

Under Armour (UAA), a leading sports apparel business, gained +11.3% for the week. A Wall Street analysis raised his rating from a hold to a buy on this stock. This is a bold call for a stock that is down -47.8% in 2017 even after this week’s rally. The analyst’s optimism stems from expectations that the athletic apparel and footwear markets will be more stable in 2018 and demand is improving. Stiff competition from the likes of Nike (NKE), which is more than 6 time the size of Under Armour, resulted in Under Armour reporting its first quarterly sales decline in the most recent quarter as illustrated in the accompanying graph.

Century Link Inc. (CTL), a communications company that is one-tenth the size of AT&T, rallied +15.8% this week. Regulatory filings disclosed several company insiders recently buying stock including the CEO purchasing about $700,000 and the COO purchasing $1 million. General consensus is that company insiders sell stock for a variety of reasons, often not being newsworthy, though they only buy for one reason…optimism about the future of the company. The stock remains lower year-to-date by -28.6%.

Freeport-McMoRan Inc. (FCX), a $15.7 billion in revenue mining company, jumped +13.4% for the week bringing its year-to-date gain to +28.7%. This is the highest price the stock has seen since 2015 when the stock was in a steady freefall that wiped out almost 90% of the company’s value in about 18 months. A stock analyst at Morgan Stanley raised his outlook on the stock from sell to neutral this week AFTER the stock has rallied about 400% during the past 2 years.

Disney (DIS), the $168 billion market value entertainment giant, struck a deal to buy most of 21st Century Fox (FOXA) in a deal valued at $52.4 billion. The deal will need to be approved by regulators. If approved, it is believe to position Disney to better compete with giant tech companies that have aggressively moved into the entertainment business. Disney’s stock jumped +6.8% on this news and is higher by the same amount year-to-date.

Economic Indicator - Reported

Producer Prices, a measure of wholesale inflation, has been inching higher faster than Consumer Prices the past year with the trend continuing in November. The Producer Price Index (PPI), excluding the volatile food and energy sectors, rose +0.2% for the month is higher by +2.4% year-over-year. The Consumer Price Index (CPI) came in at just a +0.1% gain for the month and is up +1.8% year-over-year.

Consumer prices were dampened by a sharp -1.8% drop in prices for the month suggesting significant holiday discounting. Other areas of weakness were medical care unchanged for the month and housing costs, the biggest component of the CPI, slowed to a gain of +0.2%.

Retails sales jumped an unexpected +0.8% in November compared to an estimate of just +0.3%. This report was helped by a strong +2.5% jump in non-store, or internet, sales. The strong November report was accompanied by an upward revision to the October report now at +0.5% for the month as compared to the originally reported +0.2% gain. Novembers report suggests consumer spending is very strong for the holidays which will bode well for the overall economy.

Industrial production, a measure of the manufacturing, mining, and utilities industries, came in slightly below expectations at +0.2% for November. Manufacturing gains were modest for the month, mining was strong, and utilities were weak. Capacity Utilization, a measure of the excess capacity in the economy, rose to 77.1%. This is relatively low compared to the historic average as illustrated in the accompanying graph and suggested there is still significant room for the economy to grow.

Source: Federal Reserve Economic Research

Economic Indicators – Upcoming

Home sales, both new and existing, are expected to be strong in November. New home sales jumped in the last two monthly reports and economists expect the trend to continue. Existing home sales also have recently moved higher with economists, again, expecting the trend to continue.

The final read on third quarter Gross Domestic Product (GDP) will be reported. It is expected the report will show economic growth of +3.3% for the quarter which is no different than previously reported. This report will also provide some additional insight on consumer spending and inflation, neither of which is expected to have changed.

Durable Goods Orders, new orders placed with domestic manufacturers, is a volatile number. It was down -0.8% in the prior month and forecast to by higher in the most recent month by +2.0% due to aircraft orders received by Boeing. Excluding transportation durable goods orders are still expected to have increased by a strong +0.6%.

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