ETF Investor Guide for December 2015

Click here to view the December 2015 issue. Market Perspective: Despite Market Worries, Economy Continues to Improve The Federal Reserve pulled the trigger in December and hiked interest rates for the […]

Comparing BOND to TOTL

Most bond ETFs passively track particular underlying indexes in an effort to replicate and deliver the performance of the overall bond market. This passive investment philosophy had a near-lock on […]

Market Perspective for December 21, 2015

Stocks opened to the upside on Monday, shaking off Thursday and Friday’s losses. The market is likely to hold or expand on those gains with a “Santa Claus rally” in stocks, though the window is short; the U.S. stock market will close at 1 p.m. on Thursday for the Christmas holiday and won’t reopen until Monday the 28th. If traders get an early start on the weekend’s festivities, then light volume should favor the seasonal upside bias.

Economic data is light this week, with only a few reports released. On Tuesday, the Commerce Department will issue its third and final estimate of third quarter gross domestic product. The average forecast is for 1.8 percent growth, down from the prior estimate of 2.1 percent. Additionally, existing home sales for November should reflect a 0.5 percent increase, an improvement over October’s 3.4 percent decline. November new homes sales on Wednesday will round out the housing reports for the week. The final University of Michigan Consumer Sentiment Index is expected to show a reading of 91.9, up from the initial December estimate of 91.8.

The core inflation of personal consumption expenditures (PCE) for November will also be released on Wednesday. Core inflation climbed to 2.0 percent in November, hitting the low end of the Federal Reserve’s inflation target. The Fed prefers, however, to use the PCE inflation figure provided by the Bureau of Economic Analysis, which also calculates the nation’s GDP growth. Core PCE was up 1.3 percent in October.

The slide in oil prices continues to weigh on the market. Brent crude broke its 2004 low on Monday and West Texas Intermediate is flirting with its lows from the financial crisis. Increases in U.S. drilling may be compounding the problem. Although equities advanced on Monday morning, energy shares struggled to stay positive. Low energy prices benefit consumers, but some producers and even some nations could run into trouble if prices fall, including Russia and Saudi Arabia.

Nike (NKE) and food conglomerate ConAgra (CAG) will report on earnings this week. Nike is expected to beat Wall Street estimates in revenue and earnings per share (EPS). Analysts anticipate Nike will report revenues of $7.38 billion and an EPS of $0.86 for the company’s fiscal second quarter. The sportswear company’s shares are up 37 percent on the year, contributing to recent success in both the Dow Jones Industrial Average and the consumer discretionary sector. ConAgra is expected to issue disappointing second quarter sales figures. Investors will be watching for information regarding the company’s restructuring plans.

Shares of Disney (DIS) will also be in focus this week. Despite the Star Wars buzz, shares of Disney fell on Friday and again on Monday morning. The movie set a record for U.S. box office debuts, but missed setting the global record due to a delayed January release in China which is now the world’s second largest film market. Earlier this year, Jurassic World set the global open record when the U.S. and Chinese theaters screened the film simultaneously.

Market Perspective for December 18, 2015

The Federal Reserve raised short-term interest rates by 25 basis points to fulfill most analysts’ expectations. Equities initially rallied on the news, but gave up those gains on Thursday and Friday.

The market started the week off with a strong rally as investors bought discounted shares following the recent sell-off. FedEx (FDX) released a positive report midweek, sharing optimism with the earnings market.  Shares of the firm rose 5 percent following better-than-expected quarterly results before retreating a bit on Friday. Revenues were boosted by the firm’s ground unit due to increased online shopping. The $2.58 earnings per share beat the consensus estimate of $2.51. The delivery firm also credited the success of e-commerce for its holiday success, which also signals trends for online retailers.  Oracle initially saw gains as the company delivered quarterly earnings per share that beat estimates, though revenues fell slightly.  As the week went on, however, the stock gave up its gains.

Economic reports delivered mixed signals. On Thursday, initial jobless claims fell, reflecting continued strength in labor markets. The Empire Manufacturing Survey extended its five-month decline, but the housing sector continues to confirm strength in the economy. Housing starts rebounded strongly in November and new building permits hit five-month highs.

The major drag on the markets continues to be commodity prices, especially crude oil. The price for the U.S. benchmark West Texas Intermediate crude fell to its lowest level in almost seven years, briefly trading for a bit over $34. Gold and copper futures also settled lower as investors are increasingly concerned that Fed rate hikes will lead to a stronger dollar and have a negative impact on already falling prices. On Friday, the providers of the China beige book, a private compilation of economic data from China, said they anticipate continued slowing of the economy in the current quarter. Earlier in the week, Chinese leaders said overproduction would be a major target of economic reform in 2016. If the government follows through with plans for mergers, reorganizations and plant closures to reduce production, demand for commodities could remain depressed for some time.

Bond yields spiked ahead of the Fed’s decision, but the 30-year and 10-year Treasuries declined following the move. The 5-year yield remains near its highest levels in 4 years, while the 2-year treasury broke out to a new high and is approaching a 6-year high.  High-yield bond funds opened the week with follow on selling, but the Monday lows held for the week. Investment grade bonds rallied on the week.

Emerging markets also rallied, while developed markets finished flat. The MSCI EAFE Index pulled lower by the Bank of Japan’s (BOJ) lackluster policy announcement. As with the European Central Bank in early December, it failed to satisfy investor expectations of more stimulus and the announcement backfired, sending the currency higher versus the U.S. dollar. The central bank said it will increase its annual purchases of ETFs by 300 billion yen, although it previously committed to buying 3 trillion yen worth of ETFs annually. The 10 percent increase was not enough to move the needle on investor expectations. As a result, the yen erased three days of losses and bounced more than 1 percent on Friday. After the euro rallied earlier this month, European Central Bank President Mario Draghi stated they could do more. We’ll see if BOJ Governor Kuroda makes similar comments over the coming days.