Monthly Economic Update: November 2014

Wall Street had a dramatic October, as investors grew anxious about the big Es: Ebola, Europe and easing (specifically, the end of QE3). Ultimately, stocks climbed higher with help from another big E: earnings. The S&P 500 advanced 2.32% for the month, pushing into record territory again. Many Asia Pacific stock indices posted solid gains; many European indices racked up October losses. It was a rough month for gold, silver, oil and many crop futures. Domestic indicators were mostly positive and made the U.S. look like a bright spot in the global economy. Sales picked up slightly in the housing market, and the stock market seemed to take the wrap-up of the Federal Reserve’s historic stimulus program in stride. (1)

Domestic Economic Health

The initial Q3 GDP reading suggested that the economy was now on solid footing. The Bureau of Economic Analysis reported 3.5% expansion in Q3; that and the 4.6% growth of Q2 represented the best six months for the economy in more than a decade. Consumer spending was the question mark: it grew just 1.8% in Q3, and it actually retreated 0.2% in September, a month which also brought a 0.3% decline in retail sales. Some of the Q3 personal spending slowdown could be attributed to limited wage growth; personal incomes had grown by an unspectacular 2.0% in 12 months. (2,3)

Consumer confidence, on the other hand, kept improving. The Conference Board’s October index hit 94.5, and the University of Michigan’s consumer sentiment gauge had a final October reading of 86.9. (2,3)

Thanks to 248,000 new hires, the U.S. jobless rate fell to 5.9% in September. America hadn’t seen such low unemployment since July 2008. The U-6 rate (unemployed + underemployed) dipped to a 71-month low of 11.8%. (4)

September saw no real pickup in consumer prices – just another 0.1% gain in both the headline and core Consumer Price Index. The annualized advance for both was just 1.7%. (Food prices, however, had risen 3.0% in 12 months.) Producer prices dipped 0.1% in September after being unchanged for August. (2,5)

Speaking of production, September brought a 1.0% gain in factory output, although hard goods orders tailed off 1.3%. The 59.0 reading on the Institute for Supply Management’s October manufacturing PMI defied the forecast of analysts polled by MarketWatch, who had predicted a 0.1% decline from September to a mark of 56.5. (ISM’s non-manufacturing PMI fell a whole percentage point in September to 58.6.). (2,6)

Lastly, the month ended with the American Automobile Association forecasting the average U.S. gas price to dip under $3 a gallon in early November, a prediction that came true. On November 3, AAA had a mean nationwide price of $2.98 for regular unleaded, which had become 36¢ cheaper over a year. (7,8)

Global Economic Health

Just as the Fed halted its monetary stimulus, the Bank of Japan increased its asset purchase program. On Halloween, the BofJ said that it would boost its quantitative easing to 80 trillion yen a year from the current 50 trillion yen. The announcement gave a boost to global stocks and poised Japan’s currency for depreciation. (7)

Not all the news out of the Asia Pacific region was so encouraging. China’s economy was coming off its poorest quarter since 2008: its official GDP reading for Q3 was 7.3%, down from 7.5% in Q2 and the poorest measurement taken since Q1 2009. The country’s industrial output rose to 8.0% in September from 6.9% in August, perhaps a sign of a better number for Q4. The Chinese government’s manufacturing PMI declined 0.3 points to 50.8 for October, while the HSBC/Markit PMI for the nation came in at a slightly improved 50.4. (9,10)

Was a recession imminent for the euro area? At month’s end, the European Central Bank had refrained from easing, even with the risk of deflation. Germany’s manufacturing sector grew slightly in October, but there was contraction in Italy and France and the overall Markit factory PMI for the eurozone was a tepid 50.6. (10)

World markets. European stock market investors lacked confidence in October: the month saw the Europe Dow lose 2.98%, the STOXX 600 1.83%, the FTSE MIB 5.30%, the CAC 40 4.15%, the DAX 1.56%, the RTS 2.87% and the FTSE 100 1.15%. (1)

In Asia, key indices turned in much better performances. While Korea’s KOSPI retreated 2.76%, the Shanghai Composite gained 2.38%, the Nikkei 225 1.49%, the ASX 200 4.42%, and the Asia Dow 1.98%; the Sensex and Hang Seng both advanced 4.64%. In the Americas, the Bovespa gained 0.95%, the IPC All-Share 0.09% and the DJ Americas 1.98%. Up north, the TSX Composite slipped 2.32% for October. (1)

Finally, the Global Dow lost 0.26% last month; the MSCI Emerging Markets Index rose 1.07% and the MSCI World Index advanced 0.57%. (1,11)

Commodities Markets

For the second straight month, big losses characterized this sector (select crops aside). Supply again outweighed demand for NYMEX crude: oil prices dropped 11.63% to $80.54 a barrel by Halloween. Other energy commodities were hit hard, too: heating oil slipped 5.11%, natural gas 6.35% and unleaded gasoline a whopping 16.94%. While copper moved 1.30% north on the month, silver retreated 5.44% and gold fell 2.94%; platinum futures lost 5.38%. Silver ended October at $16.11 an ounce, gold at $1,171.60 an ounce. The U.S. Dollar Index gained a little more in October. On September 30, it had settled at 85.94; on Halloween, it closed at 86.92 to go +1.14% for the month. (12,13)

With winter coming to northern climes, certain ag commodities had a great month. Wheat futures rose 10.04%, soybean futures 14.31% and corn futures 16.33%. Sugar advanced 3.36%. The major losses came in warm-weather crops: cocoa fell 11.96%, coffee 3.01%. (12)

Real Estate

September saw a minor acceleration in purchases of both new and existing homes: the National Association of Realtors reported resales up 2.4% and the Census Bureau found a 0.2% monthly advance in sales of new residences. Year-over-year, new home sales had improved 17.0%. NAR’s pending home sale index rose 0.3% for September after falling 1.0% for August. As for home prices, the yearly gain in the S&P/Case-Shiller Home Price Index continued to moderate, lessening 1.1% to 5.6% in the August edition. (2,14)

Markedly declining mortgage rates may have promoted an increase in home buying for October. On October 30, Freddie Mac had the average interest rate on a conventional home loan at 3.98%. In Freddie’s September 25 Primary Mortgage Market Survey, it was up at 4.20%. While the mean rate that Freddie measured for the 1-year ARM was 2.43% in both surveys, the 15-year fixed became cheaper in October with average interest rates falling to 3.13% from 3.36%, and so did 5/1-year ARMs with mean rates falling from 3.08% to 2.94%. (15)

As the housing industry said goodbye to another summer, the yearly rate of housing starts topped the 1 million mark again thanks to a 6.3% September rise in groundbreaking. The Census Bureau also noted a 1.5% gain in building permits for that month. (16)

Looking back … looking forward. Last month, one of the biggest threats to stocks wasn’t an economic development but a disease. The first Ebola cases reported in the U.S. and the fear about the global reach of the virus contributed to the Dow’s triple-digit plunges as much (or more) than headlines from Europe and China. The fears eventually lessened, the market went back to focusing on fundamentals, and U.S. equities came out ahead. Across October, the DJIA rose 2.04% to 17,390.52, the S&P 500 2.32% to 2,018.05, the NASDAQ 3.06% to 4,630.74 and the Russell 2000 a tremendous 6.52% to 1,173.51, taking its YTD return to +0.85%. The CBOE VIX lost 2.28% in October, descending to 14.03 on Halloween. (1)

% CHANGE YTD; 1-YR CHG; 5-YR AVG; 10-YR AVG: DJIA: +4.91 +11.87 +15.81 +7.30 NASDAQ: +10.87 +18.14 +25.29 +13.39 S&P 500: +9.18 +14.89 +18.95 +7.85

REAL YIELD 10/31 RATE 1 YR AGO 5 YRS AGO 10 YRS AGO:

10 YR TIPS 0.43% 0.40% 1.41% 1.67%

Sources: online.wsj.com, bigcharts.com, treasury.gov – 10/31/141,17,18 Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends.

So, is Wall Street poised for a great month? The market doesn’t seem to be complaining (yet) about the lack of easing from the Fed, as it remains sensitive and responsive to the needs and wishes of investors. November began with the S&P at another all-time peak, and the factors which may affect the market the most appear predictable: earnings, the mid-term elections, and the ECB’s decision on quantitative easing. On Halloween, Thomson Reuters said corporate earnings growth was averaging 9.3% with 76% of S&P 500 firms so far beating estimates, we just got the second impressive quarterly GDP reading in a row, and the Fed likely won’t make a move with interest rates until at least mid-2015 – all factors that might inspire some calm and some further gains for stocks, or at least the S&P hanging around the 2,000 level for a while. (19)

Upcoming Economic Releases

Coming up, the important economic reports include: October’s ISM services PMI and the September ADP employment report (11/5), the October Challenger job-cut report (11/6), the October employment report from the Labor Department (11/7), September wholesale inventories (11/12), October retail sales, the initial November consumer sentiment index from the University of Michigan, and September business inventories (11/14), October industrial output (11/17), the October PPI (11/18), the October Fed policy meeting minutes and October housing starts and building permits (11/19), October existing home sales, the October CPI and the Conference Board’s latest leading indicator index (11/2o), September’s Case-Shiller home price index, the Conference Board’s November consumer confidence index and the second estimate of Q3 growth from Washington (11/25), and then a raft of data all at once on the eve of Thanksgiving – October new home sales, pending home sales, personal spending and hard goods orders plus the final November University of Michigan consumer sentiment index (11/26).

Disclaimer:

This information has been derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The Europe Dow measures the European equity markets by tracking 30 leading blue-chip companies in the region. The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. The FTSE MIB (Milano Italia Borsa) is the benchmark stock market index for the Borsa Italiana, the Italian national stock exchange. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The RTS Index (abbreviated: RTSI, Russian: Индекс РТС) is a free-float capitalization-weighted index of 50 Russian stocks traded on the Moscow Exchange. The FTSE 100 Index is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. The Korea Composite Stock Price Index or KOSPI is the major stock market index of South Korea, representing all common stocks traded on the Korea Exchange. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The S&P/ASX 200 is Australia's “premier” share market index. The Asia Dow measures the Asia equity markets by tracking 30 leading blue-chip companies in the region. The BSE SENSEX (Bombay Stock Exchange Sensitive Index), also-called the BSE 30 (BOMBAY STOCK EXCHANGE) or simply the SENSEX, is a free-float market capitalization-weighted stock market index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE). The Hang Seng Index is a freefloat-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The Bovespa Index is a gross total return index weighted by traded volume & is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. The Mexican IPC index (Indice de Precios y Cotizaciones) is a major stock market index which tracks the performance of leading companies listed on the Mexican Stock Exchange. The Dow Jones Americas Index measures the Latin American equity markets by tracking 30 leading blue-chip companies in the region. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The Global Dow is a 150-stock index of corporations from around the world created by Dow Jones & Company. The MSCI World Index is a free-float weighted equity index that includes developed world markets, and does not include emerging markets. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The US Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. Barrington Capital Management, Inc. is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.

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