November Monthly Market Commentary

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

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

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  

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
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

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
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.
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October Monthly Market Commentary

As you probably know, October has the reputation of being a “wild card” month for stocks – the big U.S. indices have performed very well in some Octobers and quite poorly in others.

Stocks pulled back in October: the S&P 500 had its poorest month since May, retreating 1.98%. The Q3 earnings season proved disappointing, just as many analysts had warned. Elsewhere, the unemployment rate fell and home values continued to rebound. Our service and manufacturing sectors seemed to be expanding again. Oil prices dropped along with gas prices. Finally, “superstorm” Sandy closed trading at the NYSE for two days and left flooding and destruction throughout the Tri-State Area.1

The unemployment rate ticked up to 7.9% in October, having dipped to 7.8% in September. That was because more Americans returned to the job hunt. Labor Department revisions showed the economy adding an average of 173,000 jobs per month in August, September and October; the October gain was 171,000; a better showing than the five-figure monthly payroll expansions seen earlier in the year.2

The nation’s two most-watched consumer polls showed confidence rising: the Conference Board’s October survey improved 3.8 to a mark of 72.2 (the highest since February 2008) and the University of Michigan’s final October survey rose to 82.6, a 61-month peak. Consumers were in a buying mood, and they weren’t just spending more of their incomes on gasoline. Households increased spending by 0.8% in October, with incomes rising 0.4% and the savings rate heading to an 11-month low of 3.3%. The Commerce Department also said that consumer spending had increased 2.0% in the third.3,4,5

America’s service and manufacturing sectors seemed to have gotten out of mid-year doldrums. The Institute for Supply Management’s October manufacturing PMI rose to 51.7, a 0.2% increase from September; its September service sector PMI showed a 1.4% increase to 55.1.6,7

Gas prices jumped 7% in September (after a 9% leap in August), so the Consumer Price Index advanced 0.6% in September. Still, the overall and core CPI only showed yearly increases of 2.0%, right at the Federal Reserve’s target. The Producer Price Index jumped 1.1% in September as energy prices climbed 4.7% for the month; core PPI remained flat, however. Annualized wholesale inflation hit 2.1% in September, the highest rate since March. Inflation did not hurt retail sales; they rose 1.1% in September, and they were up 0.9% even with gas, auto and home improvement purchases factored out.8,9,10

A “superstorm” named Sandy, a ferocious product of a tropical hurricane meeting a winter jet stream, forced a two-day closure of the stock market toward the end of the month. IHS Global Insight says Sandy may cause as much as an 0.6% drag on U.S. GDP in the fourth quarter; it estimates the storm did $20 billion in real estate damage and will result in $30 billion in lost business.11

In the eyes of many economists, Europe was the region poised to impede global growth in 2013. The latest available data showed the overall unemployment rate for the European Union rising for a 17th consecutive month in September, hitting 11.6%; in Spain and Greece, unemployment was above 25%. The eurozone’s manufacturing sector shrank for a 15th straight month in September, with its overall PMI dropping to 45.4; of 17 EU nations, only Ireland had a manufacturing PMI above 50 for the month.12,13

In contrast, activity in China’s manufacturing sector showed improvement. The PRC’s official PMI indicated sector growth again, moving to 50.2 last month from 49.8 in September. HSBC’s private-sector PMI for China rose to 49.5 in October – up considerably from the previous 47.9 reading to the highest mark recorded in eight months. China’s growth rate had been 7.4% in Q3 2012, the lowest GDP reading in three years – but estimates of 4Q GDP ranged from 7.8-8.4%. Manufacturing activity in Taiwan, India and South Korea also improved in October, with Taiwan’s PMI hitting a 4-month peak.14

Performances ran the gamut last month. Some indices fell: Argentina’s MERVAL (5.35%), Russia’s MICEX (2.39%), Korea’s KOSPI (4.22%), China’s Shanghai Composite (0.83%), Brazil’s Bovespa (3.56%), India’s BSE Sensex (1.37%) and Taiwan’s TWSE 50 (5.69%). Others posted minor or major gains for October: Australia’s All Ordinaries (2.93%), Canada’s TSX Composite (0.86%), France’s CAC 40 (2.22%), the U.K.’s FTSE 100 (0.71%), Mexico’s Bolsa (1.84%), Germany’s DAX (0.62%), Japan’s Nikkei 225 (0.66%), Hong Kong’s Hang Seng (3.85%) and Malaysia’s KLCE Index (2.22%). Among regional and multinational indices, the FTSE Eurofirst 300 rose 0.66% while the MSCI World Index and MSCI Emerging Markets Index respectively fell 0.76% and 0.95% in U.S. dollar terms.15,16

Gold ended October at $1,719.10, with prices falling 3.1%; it remained up 9.7% YTD. Silver slipped 6.5% in October, copper 6.4%, platinum 5.5% and palladium 4.8%. Natural gas gained 11.2%, but oil fell 6.5% and wrapped up last month at just $86.24 a barrel. Heating oil lost 3.1%, RBOB gasoline fell 9.9% on the month, and retail gasoline prices also descended 7.0%. Some key crops were also among the October losers: corn, -0.2%; cotton, -0.8%; wheat, -3.5%; coffee, -10.9%.17,18

Shrinking inventory, especially at the low end of the market, contributed to a 1.7% reduction in existing home sales in September; still, the National Association of Realtors did note an 11.0% year-over-year increase in sales levels, and a 0.3% September gain in pending home sales. The Census Bureau said new home buying increased 5.7% in September, while the Commerce Department reported a 15.0% jump in housing starts. September’s 20-city S&P/Case-Shiller Home Price Index showed an overall yearly gain of 2.0%, up from 1.2% in August.19,20

Comparing Freddie Mac’s October 4 and November 1 Primary Mortgage Market Surveys, we see small increases in mortgage rates. The average on the 30-year fixed rose from 3.36% to 3.39% in that period; the average rate on the 15-year FRM ticked up from 2.69% to 2.70%. Average rates on 5/1-year ARMs went from 2.72% to 2.74% and average rates on 1-year ARMs edged up to 2.58% from 2.57%.21

The S&P, NASDAQ and Dow all slipped in October and so did the Russell 2000, which fell 2.24% to a month-ending close of 818.73.22

So much is up in the air as we enter November. Who will win the presidency, and what will happen with health care reforms, the debt ceiling and the Bush-era tax cuts? Will the present lame-duck Congress punt the issue of the fiscal cliff to the incoming one, arriving at a compromise for the short term? Or will the scheduled tax hikes and spending cuts be allowed to happen in full? Will Wall Street turn merely cautious in the face of all this, or bearish? There is still a surprising amount of bullish momentum, aided by recent employment, manufacturing, housing and retail data. This data stream was not quite positive enough to overcome the letdown leveled by the Q3 earnings season; indicators will need to show additional strength to ease Wall Street’s collective anxiety this month.

The news feed for November continues with ISM’s October non-manufacturing index (11/5), September wholesale inventories and the University of Michigan’s initial consumer sentiment survey for the month (11/9), October’s PPI and retail sales, September business inventories and FOMC  minutes from October 24 (11/14), the October CPI (11/15), October industrial output (11/16), October’s existing home sales and the November NAHB housing market index (11/19), October housing starts and building permits (11/20), the University of Michigan’s final consumer sentiment survey for the month and the Conference Board’s October Leading Economic Indicators index (11/21), October durable goods orders, the Conference Board’s October consumer confidence survey, the September Case-Shiller home price index and the November FHFA housing price index (11/27), October new home sales and a new Federal Reserve Beige Book (11/28), October pending home sales and the second estimate of Q3 GDP (11/29) and then October consumer spending (11/30).
To Your Prosperity,

Kevin Kroskey

This article prepared in conjunction with Peter Montoya.
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2012 Third Quarter Market Commentary

Third Quarter In Review: Climbing the Wall of Worry

It seems like every quarter we find ourselves saying the same thing: what a difference a quarter makes!  In the first two months of 2012, the U.S. stock market was recording excitingly positive returns.  The U.S. economy seemed to be back on track and there was talk that the Eurocrisis was finally behind us.  Even the pullback in March left the markets in positive territory.  Then came a difficult second quarter where the indices fell across the board, nearly wiping out the first quarter gains.  Now, in the last three months, while many investors were still anxious about Europe, deficits, paralysis in Washington, elections and unemployment, the markets have delivered an unexpected gift: a steady, gradual rise in stock prices that seemed, week by week, contrary to the mood expressed in the financial press. 

Here at the end of the third quarter, entering the home stretch for the year,  the returns on many of the broad stock indices are, surprisingly, well into double-digit territory.  Market historians will look back on the past three months as a bullish quarter, and probably conclude that investors in the first three quarters of 2012 must have been feeling ebullient bordering on giddy.

Overall, the Wilshire 5000--the broadest measure of U.S. stocks and bonds--was up 6.15% for the third quarter, and is returning a robust 15.85% so far this year.  The comparable Russell 3000 index rose 6.23% during the third quarter, and is now up 16.13% for the year.

The other stock market sectors moved in a very similar pattern.  Large cap stocks, represented by the Wilshire U.S. Large Cap index, were up 6.25% for the quarter, and now stand at a 15.97% overall gain so far in 2012.  The Russell 1000 large-cap index gained 6.31% for the third quarter, putting it up 16.28% for the first nine months of the year.  The widely-quoted S&P 500 index of large company stocks gained 5.76% in the same time period, and is up 14.56% so far this year.

The Wilshire U.S. Mid-Cap index index rose 5.59% in the three months ending September 30, up 11.86% for the year.  The Russell midcap index was also up 5.59% in the recent quarter, with a 14.00% gain so far this year.

Small company stocks have posted returns nearly identical to the large multinationals.  The Wilshire U.S. Small-Cap gained 5.16% in the third quarter, up 15.19% in the first nine months of 2012.  The Russell 2000 small-cap index gained 5.25% in the three months ending September 30, and has returned 14.23% for the year so far.  The technology-heavy Nasdaq Composite Index was up 6.17% in the third quarter, up 19.62% year to date.  Twelve years after the "tech wreck" disaster in this sector, tech stocks appear to be market leaders again.

The next time you read gloomy headlines about the economy, remember that every single industry sector in the S&P 500 is posting gains so far this year, led by telecommunication stocks (up 21.04%), information technology (up 20.64%), consumer discretionary goods manufacturers (up 19.99%), and financial stocks (19.88% gains so far this year).

Global stocks have not been as robust as American shares, but they, too, are in positive territory.  The broad-based EAFE index of developed economies rose 6.14% for the third quarter, and is now in firmly positive territory, with a gain of 6.95% so far this year.  For the first time this year, European stocks are showing gains for their investors, in dollar terms, up 8.13% for the recent quarter, now up 8.00% for the year.

The EAFE Emerging Markets index of lesser-developed economies rose 6.97% in the third quarter, and is now up 9.41% for the year.  Interestingly, the highest returns of any global index came from emerging African nations (minus Zimbabwe, which is one of the ways that EAFE calculates its indices), which are up an aggregate 34.70% so far this year.  Second place goes to an index made up of the Jordanian, Egyptian and Moroccan stock markets, up 32.81% in the first three quarters of 2012.

Commodities have also moved into positive territory, with the S&P GSCI index rising 11.54% for the quarter, now up 3.47% this year.  Energy and petroleum prices are up very modestly (0.55% and 0.93% on the year respectively); the biggest mover is agriculture (up 18.44% so far this year), with grain prices rising 31.05% due to the Midwestern drought.

On the bond side, those of us who could not imagine how U.S. Treasuries could possibly offer lower yields are watching it happen.  The 12-month T-Bonds are now yielding just 0.15%, as investors seem to be happy to essentially lend the government money with a promise that they will get it back again 12 months later.  Locking up your money for three years gets you 0.31% a year.  Ten-year issues yield 1.63%, and 30-year Treasuries bring a 2.82% annual coupon yield.  Muni bonds are also down from where they were last quarter, with aggregate yields of 0.203% (1-year), 0.286% (2-year), 0.624% (5-year) and 1.742% (10-year).  The aggregate of all AAA corporate bonds is yielding 0.76% for bonds with a five-year maturity. 

Is there an explanation for this three-month bull market during what can only be described as trying economic times?  People who have long experience with the investment markets are fond of saying that rallies "climb a wall of worry;" that is, the markets go up most steadily when it requires courage to buy into them.  These past three months seem to be one of the best examples of this adage that you are likely to see.  Today, it requires a certain degree of courage to believe in the long-term future of the economy and the long-term return on investments, and yet the market rise is evidence that many investors are finding that courage amid the discouraging headlines.

Some economists think that the stock rally was a gift from the central banks.  For months, it was rumored that the U.S. Federal Reserve Board would engineer another stimulus package, which had already been dubbed "QE3"--and indeed Fed Chairman Ben Bernanke announced that the Fed would inject $40 billion a month into the market for securitized home mortgages, adding to the money supply, possibly driving down mortgage rates and (again possibly) stimulating the housing and homebuilding sectors of the economy into hiring again.

Meanwhile, the European Central Bank has finally announced that it would do what economists were calling for three years ago: purchase Eurozone government bonds to reduce the borrowing costs of countries that are restructuring their finances--notably Spain and Italy.  After two press conferences on different sides of the Atlantic, some of our worst-case economic scenarios (a 2008-like collapse of the Eurozone banking system; a U.S. recession) seem to have become less likely to occur.

The U.S. economy is certainly not in danger of breaking any speed records as it continues to climb out of the Great Recession; in the last week of September, the government announced that from April through June, GDP grew just 1.3%.  Economists remain wary of the "fiscal cliff"--the simultaneous expiration of lower tax rates and automatic federal budget cuts--that will take place, absent Congressional intervention, at the stroke of midnight, December 31.  Add in the discouraging 8.1% unemployment rate, and there is plenty of reason not to be bullish on stocks for the last three months of the year.

But of course that was also true before stocks went up the past three months.  Optimists can point to 96,000 new jobs added in August, and the fact that long-term, the unemployment rate has been trending downward from around 10% at this time three years ago.  A Bloomberg News survey recently forecast that the U.S. economy will grow 2.1% over the next three months, and the forecasts from the Federal Reserve Board anticipate 2.5% to 3% GDP growth in 2013.  At the upper end of that estimate, we are talking about a return to economic normalcy, and a chance to chip away at the jobless rate.

Who's right?  Who knows?  All we know for sure is that the global economy is in a slow-growth recovery, with little indication that growth will accelerate dramatically or that the U.S. will slide back into recession.  Buying stocks today is a bet that the hard work of millions of people still employed will produce positive results over the long term, which will ultimately reward the owners who hold their shares.  For as long as the markets have existed, staying invested has been a good long-term strategy--and in the face of so much short-term uncertainty, this is about all we have to go on.

To Your Prosperity,

Kevin Kroskey

This article prepared in conjunction with Bob Veres.

Wilshire index data:

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Any future blog posts will be done at . Thank you, Kevin Kroskey, CFP, MBA