The Markets (as of market close January 13, 2017)
The past few weeks have seen the markets experience some volatility following several weeks of post-election gains. The Dow fell for the second time in the past three weeks, while the S&P 500 stayed about the same. Both the Global Dow and Russell 2000 posted marginal gains last week, while the NASDAQ gained almost a point. It appears that investors are in a wait-and-see mode until the president-elect’s new policies gain some traction.
The price of crude oil (WTI) fell again last week, closing at $52.52 per barrel, down from the prior week’s closing price of $53.70 per barrel. The price of gold (COMEX) increased, closing at $1,197.30 by late Friday afternoon, up from the prior week’s price of $1,172.60. The national average retail regular gasoline price increased for the sixth week in a row to $2.388 per gallon on January 9, 2017, $0.011 more than the prior week’s price and $0.392 higher than a year ago.
Last Week’s Headlines
- Retail and food services sales climbed 0.6% in December over November. However, much of the increase was tied to soaring automobile sales. Less auto sales, retail sales advanced only 0.2% during the busy holiday shopping season. Consumers really didn’t increase their spending in December, as sales, excluding autos and gas, were flat. Nevertheless, total sales were up 4.1% from December 2015. Nonstore (online) retail sales were up 13.2% from December 2015, while miscellaneous stores were up 7.1% from last year.
- Producer prices continued edging higher in December, increasing 0.3% following November’s 0.4% advance. In December, nearly 80% of the increase was attributable to a 0.7% increase in goods, led by increasing energy prices. Services inched up only 0.1%. Prices less foods, energy, and trade services moved up 0.1% in December after rising 0.2% in November. In 2016, the index less foods, energy, and trade services climbed 1.7% following a 0.3% advance in 2015.
- While a bit dated, the Job Openings and Labor Turnover report from the Bureau of Labor Statistics provides useful information on the number of job openings, hires, and quits. The latest edition for November 2016 shows the number of job openings was little changed at 5.5 million. Over the month, hires and separations were also little changed at 5.2 million and 5.0 million, respectively. The total separations rate was 3.5% for the month (3.4% in October). Within separations, the quits rate was unchanged at 2.1% and the layoffs and discharges rate was unchanged at 1.1%. The job openings rate was 3.7% in November (3.6% in October), while the hires rate was 3.6% (unchanged from the prior month).
- According to the latest information from the Bureau of Labor Statistics, import prices resumed an upward trend in December, rising 0.4%, after a 0.2% decline the previous month. The advance in December was primarily driven by higher fuel prices, which advanced 7.3% – the largest monthly increase since the index rose 10.5% in June. Excluding fuel, the import price index fell 0.2% for December. Prices for overall imports advanced 1.8% between December 2015 and December 2016, the largest 12-month increase since the index rose 3.5% in March 2012. U.S. export prices increased in December, rising 0.3% following a 0.1% decrease in November. Prices for overall exports rose 1.1% for the year ended in December, the first 12-month increase since the index advanced 0.4% in August 2014 and the largest over-the-year rise since a 1.5% increase in February 2013.
- The federal deficit shrunk in December compared to November. The December deficit was $27.5 billion compared to $136.6 billion the prior month. Government receipts were $319.2 billion, up from $199.8 billion in November, while expenditures were $346.7 billion – about $10 billion ahead of November’s receipts. These figures are comparable to December 2015, when the deficit was $14.4 billion. For fiscal 2017, which begins in October, the deficit is $208.4 billion compared to $215.5 billion for the first three months of fiscal 2016. Thus far for FY 2017, total receipts are $740.8 billion ($765.6 billion over the same three-month period in 2015), while total outlays are $949.1 billion ($981.2 billion last year).
- Consumer confidence remained at roughly the same level in January as it was in December, according to the Surveys of Consumers from the University of Michigan. Consumers maintained the same level of confidence in the current economic conditions, although consumer expectations waned a bit in January from December.
- In the week ended January 7, the advance figure for seasonally adjusted initial unemployment insurance claims was 247,000, an increase of 10,000 from the previous week’s revised level of 237,000. The advance seasonally adjusted insured unemployment rate remained at 1.5%. The advance number for seasonally adjusted insured unemployment during the week ended December 31 was 2,087,000, a decrease of 29,000 from the previous week’s revised level.
Eye on the Week Ahead
Corporate earnings reports could influence equities as investors look to whether companies finished the year strong. Consumer prices have climbed at an annual rate of 1.7% through November. The last report for 2016 on the CPI is out this week as prices push toward the Fed’s target inflation rate of 2.0%.
Now that the financial markets have rallied over the past two months, there is concern that equity valuations may have exceeded a fair valuation. The focus is now on this Friday‘s inaugural speech, as power is transferred from President Obama’s outgoing administration, to that of President-elect Trump. In order to justify current valuations, we believe the anticipated pro-business, and thus market-friendly, policies will need to happen faster than either promised or probable.
At BWFA, we are monitoring current political issues, but as always, remain most closely attuned to corporate profits. With this in mind, we are comfortable with our diversified approach, now with a slight overweight in financials. We are prudently looking to take profits where we believe prices have gotten too far ahead of themselves. There has been a lot of good news, which the market has likely priced in already, and reality may very well set in this first quarter. We still remain cautiously optimistic about the market’s medium to long term outlook, and continue to forecast GDP growth of 2.5%-3%.
As always, we appreciate your support.