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In the Markets December 26, 2016

After a strong start, the major equity indexes drifted lower and ended the week only marginally higher.  The Dow Jones Industrial Average rose for a 7th straight week, adding +90 points to close at 19933.  The Dow is inching closer to the psychologically-significant 20,000 level, up +0.46% for the week.  The LargeCap S&P 500 edged higher by +0.25%, while the S&P 400 MidCap and Russell 2000 SmallCap indexes rose +0.35% and +0.52% respectively, continuing their 2016 outperformance relative to the LargeCaps.

In international markets, Canada’s TSX advanced +0.5%.  Across the Atlantic, the United Kingdom’s FTSE rose for a third consecutive week, gaining +0.8%.  On Europe’s mainland, France’s CAC 40 added +0.13%, Germany’s DAX gained +0.4%, and Italy’s Milan FTSE rose a fifth straight week, up 1.74%.  In Asia, a mixed bag:  Japan’s Nikkei had its seventh consecutive week of gains, rising +0.14%, China’s Shanghai Composite suffered a fourth straight week of losses losing -0.4%, and Hong Kong’s Hang Seng fell -2%.  As a group, developed markets (as measured by the MSCI Developed Markets Index) rose +0.25%, while emerging markets (as measured by the MSCI Emerging Markets Index) fell -1.36%.

In commodities, precious metals are still searching for a bottom as Gold fell another -$3.80 an ounce to $1,133.60, and Silver caught up to Gold’s weakness losing -2.8% to end the week at $15.76 an ounce.  Oil was basically flat, rising +$0.07 to $53.02 a barrel for West Texas Intermediate crude.  Coincident with the rebound in oil prices, the number of U.S. previously-idled oil rigs going back into production surged to its highest level since January.

In U.S. economic news, the Labor Department reported that the number of newly unemployed jumped to the highest level since early summer.  Initial jobless claims rose a seasonally-adjusted 21,000 to 275,000, a 6-month high.  However, it also marks the 94th consecutive week of initial claims below 300,000—a threshold many analysts use as the sign of a healthy job market.  Continuing jobless claims, the number of unemployed already receiving benefits, fell by almost 79,000 to 2.04 million. 

Sales of previously owned U.S. homes rose +0.7% last month to an annual pace of 5.61 million, according to the National Association of Realtors (NAR).  Analysts noted that higher prices and lean inventories continue to weigh on the housing market.  NAR Chief Economist Lawrence Yun noted the “big obstacle is the ongoing housing shortage”.  At the current pace of sales, there is a just a 4 month supply of homes on the market, compared to the more-desirable 6 month supply.  The shortage of homes is pushing prices up: the median home price across the country is $234,900, an increase of +6.8% over November of last year.  Sales were mixed regionally.  In the Northeast, sales increased +8% accompanying a +1.4% gain in the South.  The Midwest and West both declined, ‑2.2% and -1.6% respectively.  First-time buyers made up 32% of all purchases last month.

Sales of new homes jumped last month to its second-highest pace since early 2008, another sign of robust housing demand.  The Commerce Department reported that sales ran at a 592,000 seasonally-adjusted annual rate, up +5.2% from October and up +16.5% from this time last year.  The median sales price was $305,400 in November, up $2,700 from October.  The stronger sales continued to deplete the supply of new homes for sale, with 5.1 months’ worth of new homes available for sale last month, down from 5.4 months a year ago. 

U.S. Consumer spending slowed in November after several months of gains as income growth flattened.  Personal incomes were unchanged and spending rose +0.2%, according to the Commerce Department.  Inflation also remained unchanged.  The personal consumption expenditures (PCE) index rose +1.4% compared to this time last year.  The PCE price index is the favored inflation gauge of the Federal Reserve.  Ex-food and energy, the index is up +1.6% - a retreat from the +1.8% annual increase in October and a step further away from the Fed’s 2% target. 

Confidence among consumers continued the surge following the election of Donald Trump to President, hitting its highest level in 12 years.  The University of Michigan’s Consumer Sentiment index rose to 98.2, up a steep 5 points from November.  The index is now at its highest level since January of 2004. Survey respondents stated that they expected a stronger economy that would create more jobs.  Blerina Uruci, economist at Barclay’s, stated “Ongoing solid readings of consumer confidence reinforce our view that GDP growth should remain firm in the near term, and we see the level of confidence as consistent with ongoing strength in consumer spending.” 

Orders for long-lasting “durable” goods fell last month for the first time in five months.  Orders for durable goods fell -4.6% last month, led by a drop in orders for Boeing aircraft.  The drop almost completely retraces the +4.8% increase in October.  In an unusual twist, the details of the report were actually more optimistic than the headline.  Ex-transportation (i.e., remove Boeing), orders for durable goods were up over +0.5%, the fifth straight monthly gain.  Citi economists released a note stating “Core orders are a particularly important series to follow over the next few months as we try to discern whether investment spending is picking up in post-election data. Today’s number implies that at the very least equipment investment did not decline and may be a first hint that it is on a more favorable trajectory.”

Factory production weakened last month, according to the Chicago Federal Reserve.  The Chicago Fed’s National Activity Index fell to -0.27 last month, down -0.22 from October.  The index is a weighted average of 85 economic indicators, designed so that readings above zero indicate trend growth.  Production-related indicators decreased to -0.2 in November falling from -0.01, reflecting weakness in the nation’s manufacturing sector.  Steven Shields, economist with Moody’s wrote, “A reading of -0.27 still suggests the U.S. economy expanded at a below-average rate and is easing its foot off the accelerator after a stronger performance in early summer.”

The overall U.S. economy grew at a faster pace than originally thought in the 3rd quarter, according to the Commerce Department.  Upward revisions in consumer spending and business investment pushed the latest GDP estimate up +0.3%, to a healthy 3.5% annualized rate.  In addition, strong trade data in the form of a +10% spike in exports also contributed.  Michael Gapen, chief U.S. economist at Barclay’s noted that the data signaled “the manufacturing, trade, and energy sectors stabilized during the quarter after nearly two years of contraction.”

In Canada, the steep rise of home prices has reached a level such that the Bank of Canada made the remarkable move of taking its warning of high household debt levels and red-hot home prices online in a most modern way: a video posted on YouTube.  The Bank of Canada has voiced its concerns to Canadians for months, but it appears to have fallen on deaf ears.  For example, Toronto home prices are up nearly +15% since this summer when Bank of Canada governor Stephen Poloz warned that price gains were “difficult to match up with any definition of fundamentals that you could point to.”  In addition, Statistics Canada showed that the household debt-to-income ratio broke yet another record last quarter, further increasing the Bank of Canada’s unease.

In France, International Monetary Fund chief Christine Lagarde was found guilty of criminal negligence for an improper government payout to French businessman Bernard Tapie eight years ago while she served as France’s finance minister.  The French court chose not to sentence Lagarde to a fine or jail time.  In a statement Monday, Lagarde said she was not satisfied with the court’s decision but had chosen not to appeal.

In Germany, the Finance Ministry predicted that German economic activity will be shown to have picked up in the fourth quarter as household spending remains strong and exports are likely to show improvement.  "For the final quarter, indicators are signaling a light acceleration in overall economic activity," the Finance Ministry said in its monthly report. 

The Italian government agreed to bail out the world’s oldest bank, Monte dei Paschi di Siena, after the bank failed to raise five billion euros from private investors.  Paolo Gentiloni, Italy’s new prime minister said that the government would tap a 20 billion euro fund that had already been approved by the parliament earlier this week.  In an effort to curb losses for Italy’s small investors that hold bank notes, finance minister Pier Carlo Padoan said the government would compensate small savers for their bank losses.  Small investors are estimated to hold roughly 2 billion euros worth of Monte dei Paschi’s bonds.

The Bank of Japan is more optimistic about the Japanese economy, raising its assessment for the first time since May 2015.  The BOJ’s more optimistic tone came as the government released its growth forecast for the coming year.  The government now sees the economy picking up speed to a 1.5% growth rate, from the prior 1.3%.  In a move widely expected, the BOJ kept its short-term rate target at -0.1% and its 10-year Japanese government bond yield at near zero.  It also said it would continue to buy Japanese government bonds at the previous pace of around 80 trillion yen a year.

 (sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal,,,,,,, Eurostat, Statistics Canada, Yahoo! Finance,,,, BBC,,,, FactSet; W E Sherman & Co, LLC)