Weekly Market Commentary - November 25, 2019

ECONOMIC DATA WATCH AND MARKET OUTLOOK

The S&P 500 and Dow Jones Industrial averages are less than one percent below their all-time highs, while the NASDAQ continues to climb to new heights. Markets have been boosted by better than expected corporate earnings reports from the S&P 500. With 95% (476) S&P 500 companies having reported, we are on pace for a year-over-year quarterly decline in earnings of 2.2%, which is an improvement from the original estimate of a 4.6% drop. Approximately 75.0% of companies reporting having exceeded their earning’s estimates (above the five-year average of 72.0%), while 58.0% have posted better than expected revenue growth. Further upside for U.S. equities versus international equities will be a point of debate heading into year-end. On a forward P/E basis, the US is trading at 17.7, the MSCI Europe Index is 13.8 and the MSCI Emerging Market Index comes in at 12.2 according to data provided by Yardeni Research.

As we enter next week’s Thanksgiving shortened trading sessions, markets could experience higher levels of price volatility as daily trading volumes should be lower during the holiday week. The main driver of market direction will be the on-going U.S./China trade saga. The sixteen-month reality television version of Leo Tolstoy’s War and Peace has morphed from a potential Phase One deal in October, to a possible no deal till early 2020. The major hurdles remaining are China’s insistence that the U.S. lift some existing tariffs, and the U.S. demand that China commit to a hard dollar number of agricultural products they will purchase. Complicating the matter is the recent passage by the U.S. House and Senate of the “Hong Kong Bill of Rights on Human Rights and Democracy”, which empowers the U.S. State and other Departments to impose sanctions on Chinese officials that abuse human rights in Hong Kong. Any positive or negative news regarding U.S./China trade will move markets in either direction.

In turning to next week’s economic calendar, the important data releases will center around the U.S. housing market, personal income and spending. Starting off on Tuesday is the S&P Corelogic Case-Shiller Home Price Index, which projected to rise by 0.3% in September after several months of flat readings. The year-on-year growth estimated to come in at 2.0% in August and a seven-year low, is seen holding unchanged at that level in September. Also, out on Tuesday is New Home sales which turned higher in June and ran through September, sending the three-month average to a 12-year high. The Street consensus for October’s annual sales rate of new homes is 707,000 versus 701,000 in September.

U.S. Durable Goods were weak in September, and are expected to extend their decline in October, at a consensus decline of 0.7%. Excluding transportation equipment, orders are expected to increase a modest 0.2%. Core capital goods orders have been very weak and are not expected to show much improvement, at a consensus increase of only 0.1%.

The week closes with the report on U.S. Personal income and spending which was soft in September, as were the PCE inflation reading. This is all consistent with a moderate to flat rate of general economic growth. For October, personal income and consumer spending are both expected to rise a moderate 0.3%. After no change in August, core PCE prices are expected to rise 0.2% with the year-on-year core holding unchanged at 1.7%.

THE WEEK IN REVIEW
U.S. EQUITIES
The multi-week rally in U.S. equity markets stalled last week as concerns over U.S./China trade persisted, despite positive comments from Presidents Trump and Xi.

a) Dow Jones -0.41%, MTD +3.33%, YTD +22.13 b) S&P 500 -0.29%, MTD +2.57%, YTD +26.33% c) Russell 2000 -0.45%, MTD +1.80%, YTD +19.29%

Drivers: I) China’s President Xi improved investor’s hopes for a U.S./China trade deal amidst growing uncertainty, by stating “We want to work for a Phase 1 agreement on the basis of mutual respect and equality”, during a forum in Beijing attended by a delegation of foreigners. China’s chief trade negotiator Liu He remained optimistic about striking a trade deal and invited his U.S. counterparts to China for more talks.

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II) U.S. housing starts and permits showed an increased acceleration last month. October starts fell short of the Street’s consensus but at a 1.314 million annual rate they are, outside of August’s 1.391 million, the strongest showing since May last year. Permits were the big positive in last week’s report, well above expectations at a 1.461 million rate which is the strongest since the subprime housing bubble in 2007.

III) The FOMC minutes emphasized a neutral policy outlook should be in place unless an upward or downward change in the economy would lead to a “material reassessment” of the outlook. After three rate cuts, the FOMC moved to a hold at October’s meeting, with members sharing a positive economic outlook noting that the economy has proven resilient despite continued headwinds. However, trade tensions and geopolitical risks, though easing, were still elevated. The risk of a slowdown in global growth was described as “prominent”.

IV) Consumer sentiment continues to recover from its tariff-related scare in August, at 96.8 in final November for the best reading since July. Expectations lead the report, up more than 3 points to 87.3 in a gain that likely reflects confidence in future income. Not contributing to November, however, are current conditions, down 1.6 points to 111.6 in a reading that is not pointing to consumer momentum going into the holidays.

V) Equities in November are higher with Large-Cap, Value, Financials and Healthcare leading equity price performance. The laggards for the month are Small-Cap, Growth, Utilities and REITs.

Capitalization: Large Caps +2.68% (YTD +26.38%), Mid-Caps +2.44% (YTD +26.21%) and Small Caps +1.80% (YTD +19.29). Style: Value +1.44% (YTD +20.28%) and Growth +1.40% (YTD +19.32%). Industry Groups: Technology +3.56% (YTD +41.11%), Information Technology +3.48% (YTD 40.87%), Industrials +4.06% (YTD +28.72%), Financials +4.26% (YTD +27.51%), REITs -3.07% (YTD +25.43%), Communication Services +2.35% (YTD +24.03%), Consumer Staples +0.23 (YTD +23.00%), Consumer Discretionary -0.43% (YTD +22.81%), Utilities -1.90% (YTD +21.83%), Materials +2.03% (YTD +19.25%), Healthcare +3.78% (YTD +15.10) and Energy +3.26% (YTD +7.03%).

EUROPEAN EQUITIES

The MSCI Europe index was lower last week by -0.65% as the Purchasing Managers Manufacturing Index remained in contractionary condition and Services were also weak.

Drivers: I) The Eurozone Composite PMI flash at 50.3, was below of October’s final reading of 50.6 and market expectations. This may be signaling stagnation in private sector business activity and of concern, the decline was attributable to services where the sector PMI came in at 51.5, down from October’s final 52.2 and a 10-month low. Manufacturing PMI (46.6) showed improvement versus its final October print (45.9), but is still in recession.

II) Consumer sentiment slightly improved, at -7.2, the EU Commission’s flash measure was 0.4 points stronger than its final October reading. While better than expected the rise still failed to fully reverse the previous period’s 1.1-point decline. Still, this measure of household sentiment remains well above its long-run average (minus 10.6) and its recent performance has been associated with a gradually rising trend in real retail sales.

III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -0.65% for the week (MTD +0.76%, YTD +18.26%).

ASIAN EQUITIES

Asian equity markets were mixed on continuing trade concerns, despite reports suggesting Chinese Vice Premier Liu He, Beijing’s lead trade negotiator, has invited U.S. officials to China for additional trade talks. The Dow Jones Asia Index fell by -0.10% for the week, (MTD +1.58%, YTD +6.22%).

Drivers: I) The flash estimate for the Japan services business activity index for November was 50.4, up from the final estimate of 49.7 for October. If confirmed by final data early next month, this survey indicates that activity in the services sector picked up in November but remains relatively weak. Respondents in the services sector reported stronger growth in output and new orders and improved sentiment about the outlook, but weaker growth in employment and new export orders.

II) The flash estimate for the Japan manufacturing PMI index for November is 48.6, up slightly from the final estimate of 48.4 for October. If confirmed by final data early next month, this survey has indicated contraction in the Japanese manufacturing sector for nine of the last ten months. Respondents reported output fell for an eleventh consecutive month in November, though at a slower pace than in October, while the survey’s measures of new orders and new export orders also indicated smaller declines.

III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei was lower by -0.81% (MTD +0.82%, YTD +17.75%), the Hang Seng Index rose by +1.08%(MTD -0.98%, YTD +3.01%) and the Shanghai Composite dropped by -0.21% (MTD -1.49%, YTD +15.69%).

FIXED INCOME

Treasury yields declined last week on U.S./China trade uncertainty but bounced off their lows as U.S. Consumer sentiment rose and the Markit Manufacturing PMI showed improvement.

Performance: I) The 10-year Treasury yield was lower last week ending at 1.773% down from 1.833%. The 30-year yield declined last week finishing at 2.220 dropping from 2.310%.

II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.29% last week, MTD -0.20% and YTD +8.63%. The Bloomberg Barclays US MBS TR was higher by +0.03% last week, MTD +0.02% and YTD +6.00%. The Bloomberg Barclay’s US Corporate HY Index was lower by -0.23%, MTD -0.10% and YTD +11.61%.

COMMODITIES

The DJ Commodity Index was weak last week dropping by -0.52% but is positive month to date +0.11% (YTD +6.80%).

Commodity prices declined for the week as uncertainty over US/China trade drove the USD higher, while industrial metals and agriculture fell.

Performance: I) The price of oil was unchanged last week closing at $57.93 and has risen month to date in October by +6.92% (YTD +27.57%). Oil lost the week’s price gains after China’s President Xi Jinping said Friday that “he wanted some respect,” engendering worries about the lack of a trade deal.

II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +0.24 ending at 98.24 for the week (MTD +0.91%, YTD +2.15%). The USD rose last week as the Fed stated they were on hold as to further rate cuts, and US economic data surprised to the upside.

III) Gold declined last week, after data showed November gains in the U.S. manufacturing and services indexes and a rise in consumer sentiment boosted risk assets versus the safe haven precious metal. Gold was lower by -0.49% last week, falling to $1461.5 (MTD -3.52%, YTD +14.06%).

HEDGE FUNDS

Hedge fund returns in November are mostly higher for the month with core strategies, Equity Hedge, Event Driven, Macro, Relative Value and Multi-Strategy all in positive territory.

Performance:

I) The HFRX Global Hedge Fund Index is higher at +0.39% MTD and up +6.63% YTD.
II) Equity Hedge has risen by +0.46% MTD and is up +8.92% YTD.
III) Event Driven is higher MTD +0.73% and is higher YTD +6.36%.
IV) Macro/CTA has risen by +0.26% MTD and is up +3.85% YTD.
V) Relative Value Arbitrage has advanced by +0.08% and is up +5.26% YTD.
VI) Multi-Strategy is up MTD at +0.04% and is higher by +4.93% YTD.

Data Source: Haver Economics