Over the holiday-shortened week, there was no Thanksgiving in Europe (figuratively and literally) as concerns remained focused on the ongoing sovereign debt crisis. From the domestic side, the news was fairly light.
Existing Home Sales were up +1.4%, which was a surprise improvement compared to the 3% drop experienced in September. Analysts had expected a further drop again this month. The stronger results were directly related to better single-family sales, while condos/co-ops were unchanged. The seasonally-adjusted number of homes on the market, however, was unchanged and sales prices fell by about -1% (-4.7% year-over-year).
Gross Domestic Product (3rd Quarter, Revised) was taken down from +2.5% to +2.0%, due to a downward adjustment in inventories. The sales growth number, aside from inventories, remained unchanged at 3.6%. Other revised portions were very low and mostly offset the others. It is important to note that GDP is an estimated figure—as there isn’t a conceivable way for the government to get a 100% accurate measure on an economy of this size this quickly (or any economy, for that matter, due to all the moving parts). The best they can do is create estimates, and continue to revise those estimates with increasing precision over the next few months. As additional data comes in, the estimates become increasingly accurate, but are still just that—an estimate.
Durable Goods Orders were down -0.7% for October, as shipments of core goods and new orders for core goods fell—both of which showed some lower momentum in business capex spending. Real disposable income and consumer spending both increased slightly during the past month (the income increase was the first since June).
Initial employment claims rose by 2,000 to 393,000 for the week ended November 19, and the prior week’s claims were revised up a bit.
The Univ. of Michigan Consumer Sentiment Survey was largely unchanged, as the current conditions component was a bit higher while expectations moved downward.
Of course, the key U.S. news of the week is that the congressional super-committee was unable to find agreement on $1.2 Trillion in deficit reductions. We are not especially surprised by this outcome, nor, so it appears, was the market, although equities experienced a negative day due to the poor overall sentiment and frustration surrounding the process. Of course, the ‘automatic’ cuts are not scheduled to begin until 2013, and are spread out over a decade…which softens the blow and puts some realism into the big numbers the media is focusing on.
Of course the risk, as it always is, is that negativity can begin to feed on itself: low confidence in government can cause businesses to spend less and hire less, which affects consumer incomes and spending… all the way down the line. At the same time, this has become very routine and economic data has improved as of late—which appears to help offset some of these political effects.
One item I found especially noteworthy last week was a research comment made by a major Wall Street firm that found, while studying daily volatility over the past six months, policy announcements had an overwhelming impact, while economic releases seemed to have very little. So, as many of us assumed, most of this volatility and uncertainty has been news-driven, not fundamental.
Market Notes
| Period ending 11/25/2011 |
1 Week (%) |
YTD (%) |
| DJIA |
-4.71 |
-0.61 |
| S&P 500 |
-4.66 |
-6.14 |
| Russell 2000 |
-7.39 |
-14.03 |
| MSCI-EAFE |
-5.62 |
-17.90 |
| MSCI-EM |
-6.07 |
-23.80 |
| BarCap U.S. Aggregate |
-0.11 |
6.79 |
| U.S. Treasury Yields |
3 Mo. |
2 Yr. |
5 Yr. |
10 Yr. |
30 Yr. |
| 12/31/2010 |
0.12 |
0.61 |
2.01 |
3.30 |
4.34 |
| 11/18/2011 |
0.01 |
0.29 |
0.94 |
2.01 |
2.99 |
| 11/25/2011 |
0.02 |
0.28 |
0.93 |
1.97 |
2.92 |
Markets experienced a short, albeit negative week. From a sector standpoint, the more defensive staples and healthcare areas outperformed while cyclical energy and financials underperformed. Seasonally, autumn has proven to be a higher-volatility time of year historically, albeit generally resulting in positive performance, so there is hope for the coming weeks. It is also important to note that the holiday season can tend to bring lower overall volumes, which can intensify the appearance of volatility.
Declining Chinese manufacturing numbers dipped to their lowest reading since March 2009, which weighted on global growth and foreign equity shares, in addition to the ever-present European woes.
Bonds experienced a mixed week as well, as yields on the 10-Year Treasury fell but corporate spreads rose a bit. Moody’s announced that their AAA rating for U.S. debt will be maintained, despite the lack of congressional agreement on deficit cuts, and S&P will keep its AA+ rating intact.
In the foreign bond market, a German bond auction this week did not go as well as expected—as the government was forced to pick up the excess. A combination of low yields and increased concern over Germany’s increasing responsibilities for the Eurozone’s systematic risk appeared to weigh on potential buyers. What this means is that these potential buyers are demanding a much higher yield (credit risk spread, call it) for an enticement… additionally, credit default swap spreads gapped to wider levels. At the same time, the IMF announced additional lending programs, with less restrictive requirements, to assist Europe’s stronger economies during this crisis.
Related to the European issues, Belgium, Hungary and Portugal were downgraded by S&P last week, but ratings changes are not necessarily forward-looking news, nor are they surprises by the time they occur (markets essentially price these in weeks to months in advance in most cases). As many European nations are similarly indebted and similarly intertwined, seeing these rating changes in ‘spurts’ is also not a surprise, despite the negative headlines these changes create.
Commodities were largely down for the week, approximately -1.5%, as concerns abroad raised recession risks and tempered demand expectations. While industrial metals, such as nickel and tin, were expectedly down sharply, gold and grains also lost ground.
Enjoy the week.
Karl Schroeder, RFC, CSA, CEP
Investment Advisor Representative
Schroeder Financial Services, Inc.
480-895-0611
Sources: FocusPoint Solutions, Goldman Sachs, Morgan Stanley, Morningstar, Payden & Rygel, Deutsche Bank, Wells Capital Management, Bloomberg, Reuters, Standard & Poors, MSCI, Barclays Capital, JPMorgan Asset Management, Oppenheimer Funds, PIMCO. Index performance is shown as total return, which includes dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar terms.