Following two weeks of relentless buying, risk assets slowed their flow last week. Domestic stocks declined by approximately 1% while developed international bourses fell by 0.2%. Emerging market equities, which suffered post-election, continued to slide, albeit modestly by 0.3%. Interest rates ended the week relatively unchanged, after rising sharply in the month of November (the 10-year rose more than 0.5%). Precious metals were mixed (gold down, silver up) for the week, while crude and natural gas prices spiked by more than 10%. The latter rose due to impending cold weather, while the former rose when members of the Organization of Petroleum Exporting Countries (“OPEC”) agreed to reduce oil production levels as described below.
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November in Review: This is the time of year when traders and pundits begin talking about a seasonal rise in the price of stocks known as the “Santa Claus Rally”. However, some portion of that rally may have been pulled forward to November as domestic large cap stocks (as measured by the Russell 1000 Index) climbed nearly 4%, while small cap stocks (i.e. Russell 2000 Index) jumped a remarkable 11%. International equities did not enjoy the same robust returns, while rising interest rates cut the YTD performance of traditional fixed income assets in half. It is also worth noting that the US Dollar was down on the year coming into the month, but a 3.1% rise in November pushed it back into positive territory YTD. While valuations are pretty full in domestic stocks, barring some exogenous (i.e. non-market based) event, it would not be all that surprising to see domestic equities continue to climb in December given seasonal factors and asset managers reorienting their portfolios to reflect an administration focused on fiscal stimulus.
Sources: Bloomberg and Covenant Investment Research
‘Tis the season…for surprises: Traders were still catching their breath from the one-two punch of Trump’s dramatic victory and the market’s surprising bullish reaction, when OPEC confounded the skeptics by agreeing to reduce oil production by 1.2 million barrels per day. The cut, the first since 2008, required some pretty extraordinary compromises including Saudi Arabia approving more favorable terms for Iran, and Russia (a non-OPEC country) agreeing to curtail production. Saudi Arabia is clearly bending to the impact that low oil prices are having not only on their economy, but on the valuation of state-owned Saudi Arabian Oil Co. (aka “Aramco”) of which they plan to sell shares to the public through an IPO in 2018. Quoting the Iranian Oil Minister, “It’s possible to be in the midst of rivalry and intense political differences and yet cooperate.” While the members of OPEC are notorious for fudging actual production volumes and the cuts are not scheduled to take place until January, the market reacted immediately as it is apt to do. The price of WTI Crude shot up more than 12% in two days topping out at $51.80 per barrel. Meanwhile, shouts of “Mortimer, we’re back” could be heard throughout the shale patch here at home from exploration and production companies that have a new lease on life with oil above $50 a barrel.
Economic Wrap-up: Domestic economic data over the last two weeks has been fairly strong showing rising prices and consumption levels. Speaking of which, real annualized Q3 GDP Growth was revised to 3.2% (from 2.9%) last week on the strength of improved Consumption. While 3.2% represents the best quarterly growth rate in two years, keep in mind that 0.8% of Q3’s growth came from a spike in soy bean exports that is unlikely to be repeated any time soon, meaning that run rate growth for Q3 was closer to 2.4% which is only slight above the post-Financial Crisis average. Nevertheless, early Q4 data suggests the economy is on reasonably sound footing with Personal Income rising 0.6% in October (vs. expectations of 0.4%) and Consumption rising 0.3% after being revised upward to 0.7% (from 0.5%) in September. Core Personal Consumption Expenditures (aka “PCE”, the Fed’s favored measure of inflation) in October held steady at 1.7% year-over-year. The November ISM Manufacturing Index rose to 53.2 (vs. expectations of 52.5), but it may be difficult to sustain this upward momentum in light of the recent rise in the US Dollar. The Unemployment rate fell to 4.6% in November. Although 160,000 new jobs were added, the bigger story was that 226,000 people dropped out of the labor force (bringing the two-month total to 446,000) causing the downward spike in the Unemployment rate. Nevertheless, with supportive economic data and the Fed of the opinion that the economy is reaching (or has reached) full employment, it is almost a certainty that the Fed will hike rates at their next meeting on December 13-14. The real question is what forward guidance will they offer as to the pace of rate hikes in 2017.