Stock & Bond Market Analyses (10/30 - 11/4)

Stock Market Analysis

The S&P 500 and Dow ended the week in the black, even with large declines on Wednesday and Thursday. The S&P 500 gained 0.12% while the Dow advanced 0.36%. Unfortunately, smaller issues were unable to bounce back and ended the week down. The Russell 2000 by Friday's close was down 1.56%. The U.S. Dollar Index was also lower on the week against a number of major world currencies; off about 1.6%.

Friday was a big day for the market as uncertainty about a December Fed rate hike diminished. Those doubts which had been building for some time all but disappeared as the Friday employment numbers sent stocks soaring. It appeared investors saw the news as confirmation that a rake hike will happen this month and that the economy is improving.

As employment holds steady, other areas of the economy are still struggling. For example, manufacturing remains sluggish and some may even suggest might be in its own recession. Just this week the ISM Manufacturing Survey pointed towards contraction as the index fell below 50 for the first time since 2012; the lowest since July of 2009. An obvious sign the struggles in the manufacturing sector will likely continue into 2016.

There was good news for the consumer as oil prices fell below $40 a barrel for the first time since late August. Gasoline prices are also down as the average price for gas is now about $2.04 (AAA - Daily National Average Gasoline Prices Regular Unleaded). This could help retailers as well; given this is the most important time of the year for many of them.

We are nearing the end of the year and tax-loss harvesting could possibly help reduce your tax liability for the year. It may be a good time to talk with your accountant or tax professional to see if such a strategy could benefit your taxable accounts. As mentioned earlier, oil prices are below $40 a barrel and certain industries within the energy sector have been hit hard. This might be a good area to look at for possible losses as are some other sectors such as basic materials and industrial.

We have been talking about increased volatility in the short-term and this past week was a good example. Our risk indicators remain neutral and we would recommend maintaining moderate equity levels at this time.

Trent Dysert, Portfolio Manager

Bond Market Analysis

Last week, bond prices generally lost ground by minor amounts. Yields rose six basis points on the 10 year treasury but only one basis point on the distant 30 year bond. All this came on the heels of the week ending rally in stocks. However, we saw weakness in the U.S. Dollar Index as the Dollar lost about 1.6% bringing its 52-week change to 11.4%.

OPEC ended a meeting designed to reduce production of oil with no agreement. According to the WSJ, no constraints have been agreed upon. Iran, who was formerly a major oil producer, is anxious to add to the supply in order to get cash to support its many projects. It is thought to be likely to turn the pumps on "full" as soon as possible.

Some in Washington DC and elsewhere rate low oil prices as a disappointment. But cheap energy is a boon to almost all except the producers. Prices have declined to the $40 area, down nearly 25% this year. Gold prices appear to have fallen in sympathy.

Year to date, the Ryan bond indexes are showing some small but positive returns in the three-month, one year, five year, and even 10 year treasury areas. On the other hand, utility stocks, often seen as competition for bonds, show a loss of 7.6%.

Reviewing the data, one is struck with the losses over the last year in wheat, copper, natural gas, and aluminum. It is, in fact, a very wide array of commodities that were likely slighted as China's growth began to slow.

In addition to weak commodity prices, the other big news of the week had to do with employment. According to the Wall Street Journal, observers found wide signs of progress with nonfarm payrolls rising higher, along with increased average hourly earnings, and stronger labor force participation. The construction sector added nearly 46,000 jobs in November, a good sign of increased demand in this vital segment.

According to Bloomberg, Challenger job cuts were reduced by 13.9% and nonfarm productivity rose 2.2% this last quarter. A measure of business investment, nondefense capital goods orders excluding aircraft lost ground, down about one half of 1%.

Bond investors appear to be prepared for rate increases this month. Some observers believe that in spite of the best intentions, the Fed went awry with quantitative easing, and most of the benefits have gone to stock investors and those who buy expensive dwellings and vehicles. (We note Wards estimates total vehicle sales to be on the order of 18 million vehicles.)

Now Mr. Draghi, head of the European Central Bank, assured financiers that his bank has the ability and willingness to increase stimulus in order to raise inflation and increase employment. The ECB reduced the discount rate by 10 basis points to a -0.3%. It also extended its quantitative easing program, involving a 60 billion euro monthly purchase program.

We are reluctant to support a belief that widely anticipated actions, such as FED rate increases, will speedily push yields higher. We therefore suggest a small reaction, not a major one, when the Fed finally begins to push the Fed Funds rate higher.

Our leading bond indicators remain mostly neutral, and in a slightly positive configuration. We recommend investors focus their bond investments in higher quality, moderate maturity bonds.

F James, Ph.D.