February Monthly Market Commentary

THE MONTH IN BRIEF
As February ended, a central question seemed to preoccupy Wall Street: “When will the Dow hit a new record high?” Nothing seemed to shake the Street’s upbeat mood – not the $85 billion in federal budget cuts slated for March 1, not the real estate bubble in China or political uncertainty in Italy, not the still-anemic Q4 GDP reading or the abrupt decline in personal incomes. All told, the data stream offered much to keep Wall Street in a good mood: impressive numbers from the housing sector, rebounding consumer sentiment, continuing expansion in the manufacturing and service sectors. So the Dow ended the month at 14,054.49, with bulls holding an unyielding belief that it could reach a new all-time high in March – and the index did just that.^1,2

DOMESTIC ECONOMIC HEALTH

February wrapped up with no agreement between Congress and the White House to postpone the sequestration – a 9% budget reduction for domestic programs, a 13% reduction for defense programs and a 2% cut in Medicare payments to physicians. March 27 presents a deadline for an appropriations bill to keep federal government operations sufficiently funded; the sequester cuts might be retroactively altered or undone as a result.³

Word came from the Commerce Department that consumer incomes fell 3.6% in January, a clear effect of higher payroll taxes. Yet consumer spending held up, rising 0.2% in that month. So did consumer sentiment: the University of Michigan’s monthly index was at 77.6 in February, and the Conference Board’s consumer confidence poll soared to 69.0 last month, even with the jobless rate at 7.9%.^4,5

If a rising stock market and general perception of an improving economy influenced the above numbers, tame inflation may have as well. In January, the Consumer Price Index was flat again. Retail prices had only increased 1.6% in 12 months. The troubling asterisk: core CPI (with food and energy prices factored out) rose 0.3% in January, a gain unmatched since May 2011. Also, retail sales increased just 0.1% in January compared to 0.5% in December. Wholesale inflation (as measured by the federal government’s Producer Price Index) was up 0.2% for January, and had increased 1.4% in the past year.^6,7,8

The world certainly pays attention to the Institute for Supply Management’s twin purchasing manager indices, and the latest readings on the economy from ISM have been quite positive. Its non-manufacturing index rose to 54.2 in February (the best mark since June 2011) while its service sector index read 56.0 last month, up from 55.2 in January for the highest reading in 12 months.^9,10

When the Federal Reserve’s January policy meeting minutes came out, they raised eyebrows – the Federal Open Market Committee had agreed to review its easy money policies in March, perhaps signaling an earlier-than-expected end to QE3.  The Bureau of Economic Analysis revised its estimate of Q4 GDP to +0.1%.^5,11

GLOBAL ECONOMIC HEALTH

By the end of the month, Wall Street had one eye on China and another on Italy. The PRC finally set some limits on its runaway real estate market, imposing a whopping 20% capital gains tax on real property sales, demanding higher mortgage rates and down payments and requiring cities to adopt yearly price easing targets for their housing markets. China’s manufacturing PMIs barely showed expansion in February: the official PRC PMI came in at 50.1, while the HSBC PMI read 50.4. The People’s Bank of China forecasts 3% inflation in 2013, compared to 2.6% in 2012; Bloomberg sees China’s economy growing 8.1% in 2013, up from the 13-year low of 7.8% recorded by its government last year. ^12,13

Italy’s national election produced a deadlock, raising fears that austerity measures stipulated by the European Central Bank could be rejected. Incumbent Prime Minister Mario Monti had been effectively challenged by Beppe Grillo, a populist fiercely opposed to the euro, and – of all people – disgraced former Prime Minister Silvio Berlusconi. (Italy’s jobless rate hit a 21-year peak of 11.7% in February.) On the upside, European Commission president José Manuel Barroso announced a federal surplus in Ireland and smaller payment imbalances for Italy, Portugal, Spain, and Greece. On the downside, the smaller deficits for those last four nations could be traced largely to a reduction in imports stemming from sinking demand.^4,14

WORLD MARKETS

Foreign benchmarks experienced much more turbulence than ours last month. A list of some losses: Hang Seng, -3.29%; NIFTY 50, -6.55%; MERVAL, -11.95%; Bovespa, -3.91%; Euro STOXX 50, -2.57%; CAC 40, -0.26%; DAX, -0.44%; MSCI World Index, -0.02%; MSCI Emerging Markets Index, -1.35%. The gains: S&P/ASX 200, +3.27%; KOSPI, +3.51%; TOPIX, +3.79%; FTSE 100, +1.34%; TSX Composite, +1.08%; S&P Asia 50, +0.52%.^1,15

COMMODITIES MARKETS

When was the last time gold racked up a five-month losing streak on the COMEX? You have to go back to 1997 to find another example of that, yet that was its dubious achievement in February. All key metals seemed to retreat last month: gold went 5.0%, silver -9.3%, copper -4.9%, platinum -5.5% and palladium -1.5%. Gold settled at just $1,572.30 on the COMEX on February 28. The perception of an improving economy also hurt oil, which ended February at $92.05 a barrel, its lowest NYMEX settlement price of the year. (It would head lower in early March). Natural gas futures, rose 4.4% in February. The U.S. Dollar Index rose 3.46% last month.^16,17,18

REAL ESTATE

Could a seller’s market be emerging? That possibility doesn’t seem so absurd given the latest round of indicators. Existing home sales had improved 0.4% in January even as the inventory of homes reached its lowest level April 2005, the National Association of Realtors noted; year-over-year, home prices were up 12.9%. NAR also found pending home sales rising 4.5% in January, and December’s S&P/Case-Shiller Home Price Index recorded a 6.8% 12-month increase. January also saw a 15.6% jump in new home sales, which had increased 28.9% in a year.^19,20,21,22

Between January 31 and February 28, home loan rates generally decreased. In that interval (according to Freddie Mac), the average interest rate on the 30-year FRM went from 3.53% to 3.51%. Average rates for the 15-year FRM went from 2.81% to 2.76%; the 5/1-year ARM, 2.70% to 2.61%; the 1-year ARM, 2.59% to 2.64%.²³

LOOKING BACK…LOOKING FORWARD

In addition to the gains logged by the big three in February, the Russell 2000 rose 1.00% to end the month at 911.11. The DJIA ended February at 14,054.49, the NASDAQ at 3,160.19 and the S&P 500 at 1,514.68.^1,24

While the Dow hit a new intraday high and closed at a record high on March 5, the underappreciated factoid is that the S&P 500 advanced in both January and February. As CNBC.com columnist Bob Pisani noted recently, that has happened 26 times since 1945. In each of those 26 years, the S&P finished up for the year. In 24 of those 26 years, its gain was 10% or better. In fact, the average annual ascent across those 26 years (including yield) was 24%. Historical data is simply a rear-view mirror and no guide to the future – but bulls are as optimistic as ever about this market. Could another deficit battle on Capitol Hill set stocks back? Will developments in Europe exert a drag? At this moment, little seems to shake the faith of Wall Street, which sees a clearly improving economy and a market climate with weaker headwinds.²⁸

UPCOMING ECONOMIC RELEASES: For the balance of March, the economic calendar plays out as follows ... January  factory orders and a new Fed Beige Book (3/6), the Labor Department’s February job report and January wholesale inventories (3/8), February retail sales and January business inventories (3/13), the February PPI (3/14), February’s CPI and industrial production and the University of Michigan’s preliminary March consumer sentiment survey (3/15), the March NAHB housing market index (3/18), February housing starts and building permits (3/19), a Fed policy announcement (3/20), February existing home sales, January’s FHFA housing price index and the Conference Board’s February Leading Economic Indicators index (3/21), February new home sales and durable goods orders, the Conference Board’s March consumer confidence poll and the January Case-Shiller home price index (3/26), February pending home sales (3/27), the final estimate of Q4 GDP (3/28), and February consumer spending and the final March University of Michigan consumer sentiment survey (3/29).

To Your Prosperity,

Kevin Kroskey

This article prepared in conjunction with Peter Montoya

Citations.

1 - www.bloomberg.com/markets/stocks/ [2/28/13]
2 - www.reuters.com/article/2013/03/01/us-usa-fiscal-idUSBRE91P0W220130301 [3/1/13]
3 - www.medscape.com/viewarticle/779980 [2/27/13]
4 - www.cnbc.com/id/100511717 [3/1/13]
5 - briefing.com/investor/calendars/economic/2013/02/25-01 [3/1/13]
6 - www.foxbusiness.com/economy/2013/02/21/consumer-prices-flat-in-january/ [2/22/13]
7 - www.reuters.com/article/2013/02/13/usa-economy-retail-idUSL1N0BCCZM20130213 [2/13/13]
8 - articles.marketwatch.com/2013-02-20/economy/37188507_1_wholesale-prices-vegetable-prices-higher-food-prices [2/22/13]
9 - www.ism.ws/ISMReport/NonMfgROB.cfm [3/5/13]
10 - briefing.com/investor/calendars/economic/2013/03/04-08 [3/4/13]
11 - www.usatoday.com/story/money/business/2013/02/20/january-fed-minutes/1933047/
12 - dealbook.nytimes.com/2013/03/04/chinas-push-to-cool-down-housing-raises-questions/ [3/4/13]
13 - www.bloomberg.com/news/2013-03-03/china-monetary-tightening-pressure-eases-as-growth-rebound-slows.html [3/3/13]
14 - www.nytimes.com/2013/03/05/business/global/jolt-from-italys-elections-may-not-be-enough.html [3/5/13]
15 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [2/28/13]
16 - bullionpricestoday.com/bullion-prices-plunge-in-february-us-gold-silver-coins-steady/ [3/1/13]
17 - www.bloomberg.com/news/2013-02-28/gold-falls-on-signs-of-economic-recovery-commodities-at-close.html [2/28/13]
18 - online.wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [3/1/13]
19 - www.marketwatch.com/story/home-sales-inch-up-in-january-as-inventory-shrinks-2013-02-21 [2/21/13]
20 - blogs.wsj.com/developments/2013/02/20/housing-starts-fall-but-economists-stay-positive/ [2/22/13]
21 - www.mercurynews.com/real-estate/ci_22670982/new-home-sales-hit-highest-level-more-than [2/26/13]
22 - www.census.gov/construction/nrs/pdf/newressales.pdf [2/26/13]
23 - www.freddiemac.com/pmms/ [3/4/13]
24 - money.cnn.com/quote/quote.html?symb=RUT [2/28/13]
25 - online.wsj.com/mdc/public/page/2_3024-m_globalstockindexes.html [2/28/13]
26 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=1%2F31%2F12&x=0&y=0 [2/28/13]
26 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=1%2F31%2F12&x=0&y=0 [2/28/13]
26 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=2%2F29%2F12&x=0&y=0 [2/28/13]
26 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=2%2F28%2F03&x=0&y=0 [2/28/13]
26 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=2%2F28%2F03&x=0&y=0 [2/28/13]
26 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=2%2F28%2F03&x=0&y=0 [2/28/13]
27 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [3/4/13]
28 - www.cnbc.com/id/100508355 [2/28/13]

January Monthly Market Commentary

THE MONTH IN BRIEF
The S&P 500 opened 2013 with its best month since October 2011 – and its biggest January gain in percentage terms since 1997. Analysts felt the year might start with a positive month, but few expected a 5.04% breakout for the definitive Wall Street gauge. In fact, stocks around the globe had a great month – and so did oil. A fiscal cliff deal was signed into law, and a battle over the debt ceiling was postponed. Poor monthly indicators didn’t do much to hobble real estate’s rebound. Consumer confidence surveys offered mixed signals and the unemployment rate increased, but data showed households spending, saving and earning more.¹

DOMESTIC ECONOMIC HEALTH

While the American Taxpayer Relief Act of 2012 did extend the Bush-era tax cuts for the middle class, it also approved a 2% payroll tax hike for all working Americans. Nevertheless, Wall Street cheered the deal with a big rally on the year’s first market day, even as the wealthiest households reached for their aspirin in the face of higher income, investment and estate taxes. The ATRA put off the federal spending cuts planned for January 2 until March 1. On January 31, the Senate approved a bill authored by House Republicans to temporarily suspend the federal borrowing limit through May 18.^2,3

If Americans felt relief from this, it wasn’t demonstrably reflected in key surveys. January’s edition of the Conference Board’s consumer confidence index dropped 8.1 points to 58.6 (the lowest level in 14 months) while the University of Michigan’s final January consumer sentiment survey rose a mere 0.9 points to 73.8.⁴

The jobless rate ticked up to 7.9% in January, even though non-farm payrolls expanded by 157,000 positions. (The Labor Department simultaneously announced revised hiring totals from November and December – it turned out that job creation averaged a solid 221,000 in those two months.) Personal spending rose 0.2% in December, and early dividend payouts (and other factors) prompted a 2.8% rise in after-tax incomes. America’s personal savings rate reached 6.5%, a peak unseen since May 2009.^5,6

Retail sales were up 0.5% in December. Touching on retail prices, the Consumer Price Index was flat in December, showing just a 1.7% rise for the year – well under the Federal Reserve’s inflation target. Wholesale inflation fell 0.2% in December and only rose 1.3% for 2012, the smallest annual advance in the Producer Price Index since 2008.^7,8

January’s most stunning economic news actually pertained to the fourth quarter. The initial Q4 GDP estimate from the Bureau of Economic Analysis was -0.1%, with reduced defense spending, a drop in exports and a smaller-than-expected increase in inventories being the major factors.⁵

However, two globally respected measures of the manufacturing and service sectors – the purchasing manager indices at the Institute for Supply Management – both showed expansion for January. Last month’s ISM manufacturing PMI rose to 53.1 from December’s downwardly revised 50.2 (and backing that reading up, overall durable goods orders had increased 4.6% in December). Early in January, ISM released its service sector PMI for December, which came in at 56.1.^6,9,10

GLOBAL ECONOMIC HEALTH

Faint signals of economic improvement could be glimpsed in Europe. The Markit eurozone manufacturing PMI rose from 46.1 in December to 47.9 in January, and Germany’s manufacturing PMI climbed to 49.8, on the verge of expansion.

Eurozone annualized inflation moderated 0.2% to 2.0% last month – a low unseen since November 2010. Unemployment leveled off at 11.7% in the EU in December. All this aside, while the International Monetary Fund projects global growth at 3.5% in 2013, it also forecasts an 0.2% contraction in the eurozone economy this year following an 0.4% contraction for 2012.^11,12

A late-January Reuters poll of 250 prominent economists projected growth in the Asia Pacific region moderating in 2013, with the economies of Hong Kong, Singapore, and South Korea all forecast for GDP downgrades of 0.4-0.5%. However, China’s GDP was projected to improve 0.3% to 8.1% in 2013 – which would still represent its smallest annual growth since 2000. Looking at the HSBC PMIs for the region, China’s hit a two-year peak of 52.3 last month while India’s was at 53.2; Taiwan’s was at 51.5, Vietnam’s at 50.1. HSBC PMIs for Indonesia (49.7) and South Korea (49.9) showed January contraction. Australia’s AIG PMI fell 4.1 points to 40.2, in negative territory for an eleventh straight month.^13,14

WORLD MARKETS

Gains were prevalent around the world. In Europe, the DAX went +2.15%, the CAC 40 +2.51% and the FTSE 100 +6.43%. In Asia, the Nikkei 225 rose 7.48%, the Sensex 1.11%, the Hang Seng 4.40% and the Shanghai Composite 5.05%; the KOSPI pulled back 2.49%. Looking at other benchmarks in the Americas, the Bovespa sank 1.95%, the Bolsa gained 3.60%, the TSX Composite rose 2.02% and the MERVAL soared an astonishing 21.31%.¹⁵

Among regional indices, the S&P Asia 50 was flat (actually losing 0.04%), the Euro STOXX 50 gained 2.54%, the MSCI World Index climbed 5.00% and the MSCI Emerging Markets Index advanced 1.31%.^15,16

COMMODITIES MARKETS

Platinum was the hottest marquee commodity in January, rising 9.0% on the COMEX. Oil and corn were also hot, both gaining 6.1%. Palladium futures advanced 6.0%, silver futures 3.7% and copper futures 2.2%; gold slipped 0.9% for the month. Other January performances: soybeans, +3.5%; coffee, +2.2%; wheat, +0.2%; natural gas, -0.4%; cocoa, -1.4%; sugar, -3.7%. The Thomson Reuters CRB Index had its best month since August, showing a 3.0% gain. A 3.2% January ascent put the U.S. Dollar Index at 79.24 at the end of the month.¹⁷

REAL ESTATE

Shrinking inventory (the smallest supply of houses on the market since May 2005) contributed to a 1.0% slip in existing home sales in December. However, residential resales were up 12.8% for 2012, with foreclosures and short sales accounting for 24% of transactions (down 8% from a year before). New home sales dropped 7.3% in December but were up 19.9% in 2012 (the best year for new home buying since 1983). Pending home sales fell 4.3% for December. November’s Case-Shiller Home Price Index showed a 5.5% annual gain across 20 cities, beating forecasts. Construction spending was up 0.9% in December and the NAHB/Wells Fargo Housing Market Index maintained a 6-year peak last month.^9,18,19

Home loans grew more expensive in January. At month’s end, Freddie Mac had the average interest rate on the 30-year FRM at 3.53% and rates on the 15-year FRM, 5/1-year ARM and 1-year ARM respectively averaging 2.81%, 2.70% and 2.59%. In Freddie Mac’s December 27 Primary Mortgage Market Survey, the average interest rates on those loans were respectively 3.35%, 2.65%, 2.70% and 2.56%.^20,21

LOOKING BACK…LOOKING FORWARD

Bears all but hibernated last month. The four most-watched U.S. indices all scored big gains in January, including the Russell 2000, which cracked the 900 ceiling and ended the month at 902.09. When the Dow has had a positive January, it has had a positive year 82% of the time. The S&P 500 wrapped up January at 1,498.11, the Dow at 13,860.58 and the Nasdaq at 3,142.31.^1,22

The big question for February: can the Dow and S&P reach all-time highs? On February 1, the DJIA rallied to close above 14,000 for the first time in over five years. On February 4, the Dow descended nearly 130 points with new worries about higher sovereign bond yields in Spain and Italy a big factor. The question analysts have pondered in the wake of the market’s breakout is an old one: what exactly is validating the rally? Unemployment has not lessened; the GDP reading from the fourth quarter was a letdown. Still, real estate looks better, consumer spending has not tailed off, the manufacturing and service industries seem to be expanding, and the Federal Reserve is doing its part to provide continuing stimulus to the economy. There is strong anticipation (some might even call it expectation) that the Dow and S&P will close at all-time highs in the near term. Some analysts insist a pullback is due, and warranted. Bulls counter with the argument that if the market retreats this month, the biggest factor will simply be the psychology that stocks should retreat, that this advance is simply too good to be true. In the best-case scenario, the Dow reaches an all-time high this month attributable to market fundamentals as well as confidence and excitement.²⁸

UPCOMING ECONOMIC RELEASES: The February calendar unfolds like so ... ISM’s January non-manufacturing index (2/5), December wholesale inventories (2/8), January retail sales and December business inventories (2/13), January industrial production and the University of Michigan’s preliminary February consumer sentiment survey (2/15), February’s NAHB housing market index (2/19), the January PPI, the January 30 Fed minutes, and reports on January housing starts and building permits (2/20), January’s CPI and existing home sales and the Conference Board’s January Leading Economic Indicators index (2/21), January new home sales, the Conference Board’s February consumer confidence poll and the December Case-Shiller home price index and FHFA housing price index (2/26), January durable goods orders and pending home sales (2/27), and the second reading on Q4 GDP (2/28). Reports on January consumer spending and vehicle sales and the final February University of Michigan consumer sentiment survey arrive March 1, as does the February ISM manufacturing index. February’s unemployment rate won’t be announced until March 8 – that is when the Bureau of Labor Statistics issues its next monthly report.

 

To Your Prosperity,

Kevin Kroskey

This article prepared in conjunction with Peter Montoya.

Citations.

1 - blogs.barrons.com/stockstowatchtoday/2013/01/31/dow-sp-500-see-best-january-since-1990s/ [1/31/13]
2 - www.cbsnews.com/8301-250_162-57561752/obama-signs-fiscal-cliff-bill-into-law/ [1/3/13]
3 - www.usatoday.com/story/news/politics/2013/01/31/senate-debt-limit-extension-approved/1881191/ [1/31/13]
4 - www.bloomberg.com/news/2013-02-01/u-s-michigan-consumer-sentiment-increase-may-boost-spending.html [2/1/13]
5 - www.businessweek.com/articles/2013-02-01/januarys-strong-jobs-report-trumps-a-decline-in-gdp [2/1/13]
6 - www.bloomberg.com/news/2013-01-31/consumer-spending-in-u-s-climbed-in-december-as-incomes-surged.html [1/31/13]
7 - www.usatoday.com/story/money/business/2013/01/16/consumer-price-index-december/1838907/ [1/16/13]
8 - news.morningstar.com/articlenet/article.aspx?id=581091 [1/15/13]
9 - briefing.com/investor/calendars/economic/2013/01/28-01 [2/1/13]
10 - www.ism.ws/ISMReport/NonMfgROB.cfm [1/4/13]
11 - online.wsj.com/article/SB10001424127887323701904578277370700712726.html [2/1/13]
12 - money.cnn.com/2013/01/23/news/economy/europe-economy-imf/index.html [1/23/13]
13 - www.reuters.com/article/2013/01/23/us-economy-asia-poll-idUSBRE90M0EZ20130123 [1/23/13]
14 - www.globalpost.com/dispatch/news/afp/130201/asia-manufacturing-eases-january [1/30/13]
15 - bloomberg.com/markets/stocks/ [1/31/13]
16 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [1/31/13]
17 - reuters.com/article/2013/01/31/markets-commodities-idUSL1N0B0IBT20130131 [1/31/13]
18 - www.usatoday.com/story/money/business/2013/01/22/existing-home-sales-december/1854563/ [1/22/13]
19 - www.sfgate.com/business/bloomberg/article/New-Home-Sales-Decline-Blemishes-Best-Year-Since-4223610.php [1/25/13]
20 - www.freddiemac.com/pmms/index.html?year=2012 [2/4/13]
21 - www.freddiemac.com/pmms/ [2/4/13]
22 - money.cnn.com/quote/quote.html?symb=RUT [1/31/13]
23 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [1/31/13]
24 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=1%2F31%2F12&x=0&y=0 [1/31/13]
24 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=1%2F31%2F12&x=0&y=0 [1/31/13]
24 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=1%2F31%2F12&x=0&y=0 [1/31/13]
24 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=1%2F31%2F03&x=0&y=0 [1/31/13]
24 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=1%2F31%2F03&x=0&y=0 [1/31/13]
24 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=1%2F31%2F03&x=0&y=0 [1/31/13]
25 - www.bloomberg.com/markets/stocks/ [12/31/12]
26 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [2/4/13]
27 - treasurydirect.gov/instit/annceresult/press/preanre/2002/ofm71002.pdf [1/10/03]
28 - www.usnews.com/news/business/articles/2013/02/04/us-stocks-fall-after-dows-rally-to-14000 [2/4/13]

December Monthly Market Commentary

THE MONTH IN BRIEF
Our economy doesn’t revolve around a single issue – but in December, it almost seemed as if it did. Households, businesses, economists, financiers, journalists and politicians all worried that America would fall off the “fiscal cliff” come January 2. Congress passed a partial fix at the very edge of the cliff – on New Year’s Day. In the wake of the crisis, stocks showed remarkable resilience – the S&P 500 actually gained 0.71% in December.

Away from the cliff, the real estate market was improving, overseas stock markets were rallying seemingly en masse, and commodity futures were all over the place. Hopefully, consumer confidence would rebound in January.¹

DOMESTIC ECONOMIC HEALTH
The small-scale fiscal cliff deal hammered out in the waning hours of 2012 hiked some taxes, extended some tax breaks and settled more than a few questions. It preserved the Bush-era tax cuts for all but the wealthiest taxpayers (the highest federal income tax bracket went from 35% to 39.6%), took the top estate tax rate to 40%, permanently patched the Alternative Minimum Tax, extended long-term unemployment benefits for another year and set dividend and long-term capital gains tax rates at 20%.² 

Consumers more or less bit their nails last month waiting on a resolution. The Conference Board’s consumer confidence index fell 6.4 points to 65.1 in December; economists expected a decline of 1.5 points. The University of Michigan’s consumer sentiment survey hit 72.9, losing 9.8 points on the month. On the bright side, the jobless rate had dipped to 7.7% in November.^3,4

Households were spending more money. Retail sales managed to rise 0.3% in November, and personal spending rose 0.4% in that month. Consumer prices declined 0.3% in November – their first retreat since May. Annualized consumer inflation was running at a mere 1.8%.^5,6,7

The Federal Reserve announced it would buy $45 billion in longer-term Treasuries beginning in January, following the expiration of Operation Twist v. 2.0. It also made one of its most direct and clear policy statements in some time: it said interest rates would remain at rock-bottom levels “at least as long” as inflation is 2.5% or less and the jobless rate remains above 6.5%.^7,8

The twin Institute for Supply Management purchasing manager indices showed some improvement. The November service sector PMI rose 0.5% to 54.7 while the manufacturing PMI came in at 50.7 in December, up 1.2% for the month and back in expansion territory. Total durable goods orders had increased 0.7% in November; wholesale inflation fell 0.8% in that month to an annual pace of 1.5%.^6,9,10,11

    
GLOBAL ECONOMIC HEALTH
As 2013 began, German finance minister Wolfgang Schaeuble looked at the EU debt problem and proclaimed, “I think we have the worst behind us.” However, the Wall Street Journal reminded its readers that the EU was living with a “perma crisis”. The eurozone didn’t fracture in 2012, European stocks realized big annual gains, and net foreign portfolio investment in Italy and Spain actually turned positive in December. Yet many analysts saw a bailout ahead for Spain (even as its 10-year bond yield fell to 5.23% at the end of last month), and Greece hadn’t left the danger zone. German manufacturing contracted for a tenth straight month in December, Italian manufacturing for a seventeenth straight month.^12,13,14

China was holding up nicely: its official manufacturing PMI came in at 50.6 for a second straight month, and HSBC’s China PMI reached its highest level since May. India’s Markit PMI had its best month since January 2012 in December, rising to a healthy 54.7. Factory activity increased in the PRC, Taiwan and South Korea last month as well.¹⁴  

WORLD MARKETS
Virtually all benchmarks of consequence advanced last month. In Europe, the DAX rose 2.79% in December, the FTSE 100 0.53% and the CAC 40 2.36%. On our side of the pond, the TSX Composite gained 1.59%, the Bovespa 6.05% and Mexico’s Bolsa 4.48%. The Nikkei 225 soared an eye-popping 10.05%; the Shanghai Composite topped that with a December gain of 14.60%. The Sensex rose 1.46%, the KOSPI 3.32%, the Hang Seng 2.84% and the All Ordinaries 3.17%. Four major overseas indices gained 20% or better in 2012 – the Sensex (31.20%), the DAX (29.06%), the Nikkei 225 (22.94%) and the Hang Seng (22.91%). The MSCI World Index went +1.75% in December to finish 2012 at +13.18%; the MSCI Emerging Markets Index rose 4.78% last month, leaving it at +15.15% for 2012.^1,15

COMMODITIES MARKETS

Precious metals had a poor month but a solid year. Silver futures dipped 2.2% in December and gold futures plunged 9.2%; platinum fell 3.9% while palladium gained 2.2%. For the year, gold gained 7.0% on the COMEX, finishing 2012 at $1,675.80 an ounce; palladium rose 7.2%, silver 8.3% and platinum 9.8%. NYMEX crude gained $1.02 on December 31 to settle at $91.82 a barrel (it lost 7.1% in 2012, its poorest year since 2008; Brent crude gained 3.4% last year). Natural gas rose 12.1% on the year. Crop futures were up and down, leading to the following annual gains and losses as December ended: cocoa, +6.0%; coffee, -37.0%; corn, +7.3%; soybeans, +18.8%; sugar, -16.0%; wheat, +19.3%. The U.S. Dollar Index ended 2012 at 79.77, losing 0.47% for December.^16,17,18,19

REAL ESTATE
New home sales rose 4.4% in November, the Census Bureau noted. The National Association of Realtors reported November gains of 5.9% in existing home sales (to a three-year peak) and 1.7% in pending home sales; residential resales were up 14.5% in the past 12 months. The October S&P/Case-Shiller Home Price Index recorded the index’s best annual advance in existing home prices since the May 2010 edition (4.3%). Building permits rose 3.6% in November; housing starts fell 3.0%, but were up 21.6% year-over-year.^4,20,21

Some key mortgage rates ticked up in December. Comparing Freddie Mac’s November 29 and December 27 Primary Mortgage Market Surveys, the average interest rate on the 30-year FRM rose 0.03% to 3.35%. Average rates on 15-year FRMs went from 2.64% to 2.65% in that period; average rates on 5/1-year ARMs declined 0.02% to 2.70. Average rates on 1-year ARMs were unchanged at 2.56%.²²

LOOKING BACK…LOOKING FORWARD
All that worry masked a good year for equities. The S&P 500 ended 2012 at 1,426.19, the Dow at 13,104.14 and the Nasdaq at 3,019.51.¹

Wall Street was elated when Congress passed a partial fix for the fiscal cliff dilemma. Will the exuberance continue through the new quarter, even if the next earnings season disappoints and legislators resume skirmishing over spending cuts? There is a growing assumption that 2013 will turn out to be a strong year for the markets, maybe a year in which stocks face milder threats than in 2011 and 2012. The optimism on Wall Street is palpable: there seems to be a base level of confidence in the potential of the market that we haven’t seen in a while, and hopefully headlines about Spain or spending cuts or America’s creditworthiness won’t erode it. The economy is still facing obstacles, but 2013 may be a year without debacles of the kind that have threatened to wipe out gains entirely or invite a new recession. Will the bull market continue to flourish this year? Optimism seems to be catching on, and perhaps it will influence market behavior significantly in the coming quarters.

UPCOMING ECONOMIC RELEASES: The rest of January unfolds like this: ISM’s December non-manufacturing index, November factory orders and the December jobs report (1/4), November wholesale inventories (1/10), December retail sales, November business inventories and the December PPI (1/15), January’s NAHB housing market index, a new Fed Beige Book and December’s CPI and industrial output (1/16), December housing starts and building permits (1/17), the University of Michigan’s preliminary consumer sentiment survey for January (1/18), December existing home sales (1/22), the November FHFA housing price index (1/23), the Conference Board’s Leading Economic Indicators index for December (1/24), December new home sales (1/25), December durable goods orders and pending home sales (1/28), the Conference Board’s first monthly consumer confidence survey of 2013 and the November Case-Shiller home price index (1/29), an FOMC policy statement and the initial estimate of Q4 GDP out of Washington (1/30), and the December consumer spending report (1/31). The University of Michigan’s final consumer sentiment survey for January actually comes out on February 1, a day loaded with other crucial data (the January jobs report, the January ISM manufacturing index and January auto sales figures).

To Your Prosperity,

Kevin Kroskey

This article prepared in conjunction with Peter Montoya.

Citations.
1 - www.bloomberg.com/markets/stocks/ [12/31/12]

2 – www.cnbc.com/id/100348205 [1/2/13]

3 - www.nytimes.com/2012/12/28/business/economy/weekly-jobless-claims-fall.html [12/28/12]

4 - www.reuters.com/article/2012/12/21/us-usa-economy-sentiment-idUSBRE8BK0OO20121221 [12/21/12]

5 - www.reuters.com/article/2012/12/13/usa-economy-retail-idUSL1E8NCFAU20121213 [12/13/12]

6 - www.nytimes.com/2012/12/22/business/economy/consumer-spending-spurs-forecasts-for-faster-growth.html [12/22/12]

7 - www.bloomberg.com/news/2012-12-14/consumer-prices-in-u-s-decline-more-than-forecast-in-november.html [12/14/12]

8 - www.reuters.com/article/2012/12/31/usa-fed-schedule-idUSL1E8NV3N920121231 [12/31/12]

9 - www.ism.ws/ISMReport/NonMfgROB.cfm [12/5/12]

10 - www.ism.ws/ISMReport/MfgROB.cfm [1/2/13]

11 - www.businessweek.com/news/2012-12-13/wholesale-prices-in-u-dot-s-dot-fell-more-than-forecast-in-november [12/13/12]

12 - www.dailyfinance.com/article/german-finmin-says-worst-of-euro-debt-crisis-over/892761/ [1/3/13]

13 - online.wsj.com/article/SB10001424127887323297104578177410198803712.html [1/1/13]

14 - www.foxbusiness.com/news/2013/01/02/global-economy-euro-zone-factory-slump-deepens-but-asia-perks-up/ [1/2/13]

15 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [12/31/12]

16 - bullionpricestoday.com/bullion-prices-rise-in-2012-gold-logs-12th-annual-gain/ [12/31/12]

17 - online.wsj.com/article/SB10001424127887323820104578213863589952592.html [12/31/12]

18 - www.reuters.com/article/2012/12/31/markets-commodities-idUSL1E8NV10320121231 [12/31/12]

19 - online.wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [1/2/13]

20 - www.bloomberg.com/news/2012-12-28/pending-sales-of-existing-u-s-homes-climb-for-third-month-1-.html [12/28/12]

21 - money.msn.com/now/post.aspx?post=804aa73d-050d-4fe5-8985-28861e824d7d [12/21/12]

22 - www.freddiemac.com/pmms/ [1/2/13]

23 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [1/3/13]

24 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=12%2F31%2F02&x=0&y=0 [12/31/12]

24 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=12%2F31%2F02&x=0&y=0 [12/31/12]

24 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F31%2F02&x=0&y=0 [12/31/12]

25 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [1/2/13]

26 - treasurydirect.gov/instit/annceresult/press/preanre/2002/ofm71002.pdf [7/10/02]

 

November Monthly Market Commentary

THE MONTH IN BRIEF
In November, a presidential election cleared up a few ambiguities for Wall Street; an oncoming fiscal cliff presented many others. Anxiety was prevalent, yet the S&P 500 managed to gain 0.29% for the month. The latest economic indicators were encouraging enough to distract investors from worries about 2013. Many of the major global indexes advanced in November; some key commodities retreated. The latest reports showed our manufacturing sector contracting and household spending declining. News out of Europe and China was less troubling than in past months.¹

DOMESTIC ECONOMIC HEALTH
Personal spending fell 0.2% for October, 0.3% when adjusted for inflation, the first downturn since June. Incomes were flat for the first month since April. Perhaps this development wouldn’t be repeated in November, as the International Council of Shopping Centers estimated that chain store sales during Thanksgiving week were 3.3% improved from a year ago.^2,3
 

Consumer confidence was not flagging. In fact, the Conference Board’s monthly index rose to a 57-month peak in November at 73.7. The University of Michigan’s consumer sentiment index rose 0.1 in November to 82.7.^3,4

U.S. manufacturing contracted: the Institute for Supply Management’s November manufacturing PMI fell sharply to 49.5 from 51.7 in October. That 49.5 reading was the lowest since June 2009. ISM’s service sector was still at a respectable 54.2 in October, declining 0.9% for the month. Durable goods spending held up for October;  overall, it was flat for the month and actually increased 1.5% minus transportation orders, suggesting that many companies were spending even as the fiscal cliff loomed. The federal government revised Q3 GDP north to 2.7%.^2,3,5,6
 

In October, annualized inflation was near the Federal Reserve’s target: the Consumer Price Index had risen 2.2% in a year and 0.1% in a month. Core CPI was up 2.0% annually and 0.2% in October. The Producer Price Index fell 0.2% in October as energy and vehicle costs waned, its first retreat in five months.⁷

 

President Obama’s reelection on November 6 had financial implications. Higher taxes to fund health care reforms seemed more probable, and efforts to repeal or scale back the Dodd-Frank Act were dealt a setback. Treasury Secretary Timothy Geithner appeared poised to leave the cabinet in 2013, and the New York Times reported that Federal Reserve Chairman Ben Bernanke had told friends that he would not seek another term in 2014 regardless of who was in the White House.⁸

GLOBAL ECONOMIC HEALTH
It was official: Europe was again in recession. The European Union’s EuroStat office reported Q3 GDP shrinking 0.1% after declining 0.2% in Q2. In a new Bloomberg Global Poll of 800+ analysts, traders and investors, 53% of respondents felt Germany would enter a recession next year; though its unemployment rate was near a two-decade low, its retail sales had fallen 2.8% in October. While yields on Spanish bonds had declined from troubling July highs, 83% of those asked in the Bloomberg poll felt Spain would need a bailout in the next year. The EU did extend repayment terms (and lowered interest rates) on the latest rescue loan for Greece, with new confidence that its economy was finally on track to be repaired. ^9,10

Data from China and other Asia-Pacific economies offered some bright spots. While GDP projections for China in ranged anywhere from 5.5% across the next six years (the Conference Board) to 9.3% in 2013 (Renmin University), its official purchasing managers index showed improvement to 50.6 in November while the HSBC China PMI hit a 13-month peak of 50.5. PMIs in Indonesia and Vietnam were above 50 in November; PMIs in Taiwan, Australia and South Korea were not.^11,12  

WORLD MARKETS
November was a good month for many indices: the MSCI Emerging Markets Index (+1.18%), the MSCI World Index (+1.07%), the CAC 40 (+2.83%), the Hang Seng (+2.81%), the Nikkei 225 (+6.83%), the FTSEurofirst 300 (+1.48%), the TSE 50 (+6.46%), the Sensex (+4.93%), the DAX (+1.66%) and the KOSPI (+1.75%). It was a subpar month for the Shanghai Composite (-3.99%), the TSX Composite (-1.11%), the Bovespa (-0.36%) and the Micex in Russia (-1.16%).^13,14
 

COMMODITIES MARKETS

Oil was the leader among the major energy futures in November, up 3.1% to a November 30 settlement price of $88.91 on the NYMEX. Natural gas futures dropped 3.5%, heating oil futures 0.9%. While gold lost a little ground (0.4%) in November, it was still up 9.3% YTD at month’s end at $1,712.70. Other metals had a better month, with silver rising 3.0%, platinum 1.8% and palladium (this is not a misprint) 12.9%. On the farm, cotton rose 5.5%, cocoa 4.6%, orange juice 16.0% and hogs 11.0%; sugar lost 0.6%, corn 0.4%, coffee 2.6%, soybeans 7.1% and wheat 0.1%. The U.S. Dollar Index rose 0.29% last month.^15,16,17

REAL ESTATE
The numbers that mean the most in this sector were strikingly positive. October data from the National Association of Realtors showed existing home sales had improved 10.9% from a year before with an 11.1% increase in the median sale price ($178,600). The Census Bureau noted a 17.2% annual rise in new home sales. (For the month of October, existing home sales were up 2.1% while new home sales were down 0.3%; NAR had pending home sales up 5.2% to the highest level since March 2007.) The S&P/Case-Shiller Home Price Index had showed eight straight months of gains as of September; housing starts rose 3.6% in October to a five-year high, and builder confidence (as measured by the November National Association of Home Builders Housing Market Index) reached a six-and-a-half year peak. At the end of October, the supply of existing homes on the market dropped to a ten-year low, and the new home inventory was close to a 50-year low.^{3,18,19,20,21}
 

If all that good news wasn’t enough, QE3 was helping to reduce mortgage rates yet further. From November 1 to November 29, average interest rates on conventional 30-year home loans fell from 3.39% to 3.32%. The average rate on the 15-year FRM dropped from 2.70% to 2.64%. Average rates on 5/1-year ARMs and 1-year ARMs respectively declined to 2.72% and 2.56% (a 0.02% decrease for both loan types). These numbers come from Freddie Mac’s Primary Mortgage Market Survey.²²

 

LOOKING BACK…LOOKING FORWARD

The CBOE VIX ended November at a remarkably low 15.86. The NASDAQ wrapped up the month at 3,010.24, the S&P 500 at 1,416.25 and the DJIA at 13,025.04.¹

Last month, the market found enough hope, anticipation and solid fundamental indicators to overcome worries about the fiscal cliff and an earnings season that was as discouraging as analysts had forecast. Could something similar play out this month? A short-term answer to the fiscal cliff/slope with selective spending cuts and tax hikes may be more likely that anything resembling a sweeping “grand bargain”, and with the agreeability of the earliest negotiations seemingly eroding, a relatively minor fix may be exactly what we get. If indications of that emerge, it may amount to a kind of aspirin for Wall Street; signs of minor progress on this issue may appease the markets more than a perilous “either/or” as 2013 gets closer and closer. (Ratings agencies expect more than slight progress, however.) If the cliff is averted, some economists and analysts think America’s economic rebound will gather additional momentum in 2013.

UPCOMING ECONOMIC RELEASES: Across the rest of December, the list looks like this: ISM’s October non-manufacturing index and October factory orders (12/5), November’s jobs report and the University of Michigan’s initial consumer sentiment survey for the month (12/7), October wholesale inventories (12/11), an FOMC policy decision (12/12), November retail sales, October business inventories and the November PPI (12/13), November’s CPI and industrial output (12/14), the December NAHB housing market index (11/18), November housing starts and building permits (12/19), November existing home sales, the Conference Board’s November Leading Economic Indicators index, the final estimate of Q3 GDP and the October FHFA housing price index (12/20), the University of Michigan’s final consumer sentiment survey for December plus the November consumer spending figures (12/21), November durable goods orders (12/24), the October Case-Shiller home price index (12/26), the Conference Board’s December consumer confidence survey and November new home sales numbers (12/27), and finally, the November pending home sales report from NAR (12/28).


To Your Prosperity,

Kevin Kroskey

This article prepared in conjunction with Peter Montoya.

Citations.

1 - www.cnbc.com/id/50025105 [11/30/12]

2 - www.foxbusiness.com/economy/2012/11/30/consumer-spending-makes-unexpected-fall-in-october/ [11/30/12]

3 - news.investors.com/economy/112712-634800-fiscal-cliff-fears-dont-sink-durable-goods-confidence.htm [11/27/12]

4 - www.latimes.com/business/money/la-fi-mo-economy-consumer-20121121,0,596839.story [11/21/12]

5 - www.ism.ws/ISMReport/MfgROB.cfm [12/3/12]

6 - www.ism.ws/ISMReport/NonMfgROB.cfm [11/5/12]

7 - www.bloomberg.com/news/2012-11-15/consumer-prices-in-u-s-increased-at-a-slower-pace-in-october.html [11/15/12]

8 - seattletimes.com/html/businesstechnology/2019631568_treasurysecretaryxml.html [11/14/12]

9 - www.csmonitor.com/Business/Paper-Economy/2012/1116/EU-dips-into-recession.-Is-the-US-next [11/16/12]

10 - www.businessweek.com/news/2012-11-29/germany-seen-recession-bound-in-poll-showing-euro-crisis-deepens [11/29/12]

11 - online.wsj.com/article/SB10001424127887323401904578155952365105568.html [12/3/12]

12 - dealbook.nytimes.com/2012/11/26/the-confusing-outlooks-for-chinas-growth/ [11/26/12]

13 - markets.on.nytimes.com/research/markets/worldmarkets/worldmarkets.asp [11/30/12]

14 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [11/30/12]

15 - www.bloomberg.com/news/2012-11-30/oil-caps-monthly-gain-as-gold-extends-drop-commodities-at-close.html [11/30/12]

16 - www.coinnews.net/2012/12/01/gold-dips-in-november-silver-up-us-bullion-coin-sales-sizzle/ [11/30/12]

17 - online.wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [12/3/12]

18 - www.latimes.com/business/money/la-fi-mo-existing-home-sales-homebuilder-confidence-20121119,0,207630.story [11/19/12]

19 - abcnews.go.com/blogs/business/2012/11/housing-starts-surged-3-6-pct-in-october/ [11/20/12]

20 - www.philly.com/philly/business/20121130_Pending_home_sales_in_Oct__hit_nearly_6-year_high.html [11/30/12]

21 - www.latimes.com/business/la-fi-mo-new-home-sales-20121128,0,3039964.story [11/28/12]

22 - www.freddiemac.com/pmms/ [12/3/12]

23 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [12/3/12]

24 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=11%2F30%2F11&x=0&y=0 [11/30/12]

24 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=11%2F30%2F11&x=0&y=0 [11/30/12]

24 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=11%2F30%2F11&x=0&y=0 [11/30/12]

24 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=11%2F29%2F02&x=0&y=0 [11/30/12]

24 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=11%2F29%2F02&x=0&y=0 [11/30/12]

24 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=11%2F29%2F02&x=0&y=0 [11/30/12]

25 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield [11/30/12]

25 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [11/30/12]

26 - treasurydirect.gov/instit/annceresult/press/preanre/2002/ofm71002.pdf [7/10/02]