Market Perspective for December 1, 2017

Tax reform fueled major indexes to new highs. SPDR Industrials (XLI) and Financials (XLF) rose 3.19 and 5.26 percent.  The Dow Jones Industrial Average gained 2.86 percent. The Nasdaq lost 0.60 percent on the week after making a new high on Tuesday. The Dow Jones Transportation Index climbed 5.89 percent as investors priced in the prospect of faster GDP growth.

October new homes sales hit an annualized pace of 685,000, on par with the robust economic expansions of the 1960s and 1980s. iShares U.S. Home Construction (ITB) rose for the 13th time in 14 weeks.

The Bureau of Economic Analysis revised its third-quarter GDP growth estimate to 3.3 percent. A third and final estimate is due in December. The Federal Reserve Bank of Atlanta adjusted its fourth-quarter forecast to 2.7 percent growth, in line with the economist consensus.

October personal income, pending home sales, construction and consumer spending all beat expectations. Manufacturing PMIs eased from October highs, but came in stronger than the flash numbers released a week ago. The production subcategory hit its highest level since 2011.

The United Kingdom’s manufacturing PMI hit a 4-year high, while the Eurozone PMI hit a 17-year high. Canada reported job growth of 79,500 in November, more than double the October figure. Adjusted for population, this is more than triple the pace of job growth in the United States. The Canadian dollar erased all of its losses for the week with a big gain of 1.6 percent on Friday, the largest one-day move since early September.

OPEC extended production cuts through the end of 2018 this week. The market anticipated the move and the effect on oil prices was muted. West Texas Intermediate crude oil peaked at $59 last Friday and fell as low as $56 before bouncing. Oil-related equities rallied on the news.

Technology stocks sold off this week as investors rotated into value. SPDR Technology (XLK) fell 1.40 percent. Relative to the rally in financials, it was the single worst week for technology since the brief sell-off in June. Financials, industrials and transportation all saw the best weekly performance in over a year. Utilities (XLU) saw its ninth consecutive weekly gain. Vanguard Value (VTV) increased 2.99 percent this week. Vanguard Growth (VUG) was unchanged.

iShares MSCI EAFE (EFA) fell 0.67 percent this week, behind the S&P 500 Index (SPY) gain of 1.67 percent. iShares MSCI Emerging Markets (EEM) slid 3.90 percent as Chinese shares declined.

News of a coalition government in Germany between Chancellor Angela Merkel’s CDU and the SPD boosted the euro this week. However, late on Friday, the SPD denied there was any talk of a deal. Without the SPD, Merkel can either form a minority government or hold new elections in February. iShares MSCI Germany (EWG) fell 1.02 percent on the week.

Earnings news was light this week. Kroger (KR), the largest independent supermarket chain, reported surprisingly strong earnings despite competition from Amazon (AMZN) and Wal-Mart (WMT). Shares rose 11.7 percent and lifted SPDR Consumer Staples (XLP) 2.7 percent for the week.

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