Please find the next blog in our monthly series that provides timely market data as well as perspectives on the current state of the economy and the global financial markets.
Recent economic data showed the US economy delivered solid growth during the third quarter after a tepid pace in the first half of 2016. US households boosted spending against a backdrop of solid employment growth, cheap gasoline and rising home values. The Commerce Department showed 3Q16 gross domestic product rose at a 3.2% annualized rate, the fastest pace in two years. The rate of consumer spending, which accounts for almost 70% of economic activity, grew at a 2.8% annualized rate, while businesses ramped spending on inventories adding to overall growth for the first time since early 2015.
US hiring climbed in November as US employers added 178,000 jobs following a 142,000 rise in October. Average hourly earnings fell by 0.1% from the prior month to $25.89, the first decline since December 2014 but rose 2.5% over the 12 months ended in November. The unemployment rate, which is derived from a separate Labor Department survey, fell 0.3% to 4.6%, partly due to unemployed Americans dropping out of the work force. It appears Americans are becoming more optimistic about their future as a measure of consumer confidence rose to 93.8, a six month high, from 87.2 in October.
The US housing sector continued to gain momentum as sales of previously owned US homes climbed in October to the highest since February 2007. Median prices rose 6.0% from October 2015 and inventories fell 4.3% over the same period. The November Federal Reserve (Fed) meeting resulted in benchmark rates remaining between a range of 0.25% to 0.50%, but minutes showed a broad consensus for a rate hike was forming based on the view that “near term risks to the economic outlook are roughly balanced.” Markets placed a 100% probability that the Fed would hike rates at least 0.25% in December.
Stocks rallied in November, with all major US indexes touching records amid speculation that newly elected President Donald Trump will increase government spending to help stimulate the US economy. The S&P 500 and the Dow Jones Industrial Average set new highs in November with the S&P 500 surpassing 2,200 for the first time and the Dow surpassing 19,000 for the first time. For the month, the S&P 500 rose 3.7%, the best monthly performance since July, following a 1.8% decline in October. Seven of the eleven sectors posted gains, as the top performer was financials, up 13.7%, amid investor optimism the new administration may reduce regulation. Energy was boosted by a jump in oil prices after OPEC struck a deal to limit production. Small cap stocks gained in November, as the Russell 2000 advanced 11.2%. Investors rotated toward more domestically oriented equities that benefit from rising economic growth. All small cap sectors advanced, led by energy and materials stocks that are related to infrastructure.
Globally equities advanced, but a rising US dollar (USD) weighed on performance. The potential for higher economic growth attracted foreign investors into the USD, which reached its highest level since January against a currency basket of 10 major peers. The USD posted a 3.9% monthly advance. The MSCI World index increased 1.5%, while the broad based MSCI ACWI index eked out a slight gain of 0.8%. European equity sectors expected to benefit from increased fiscal spending on infrastructure rose, but overall the Stoxx 600 index lost 2.3% for the month. Japanese equities fell over 2.0%. Higher chances of an interest rate increase by the Fed in December hurt emerging markets in November. A basket of emerging market currencies versus the USD fell 2.6% for the month. Likewise, emerging market equities reversed course, ending five consecutive monthly advances, posting a 4.6% decline. Ten of the eleven sectors lost ground with material stocks the lone sector in positive territory.
Crude oil surged 9.3% on November 30 after OPEC agreed to production cuts, closing at $49.44 per barrel, advancing 5.5% for the month. Gold slid as a stronger USD reduced the appeal of the precious metal.
Bonds suffered losses in November as potential increases in government spending and OPEC’s agreement to cut oil production raised inflationary expectations and prompted investors to rotate out of low yielding government debt. The US Treasury (UST) 10-year yield traded within a range of 1.71% and 2.41% for the month, before closing at 2.38%, a jump of 56 basis points (bps). UST 30-year yields rose 46 bps to 3.04%. UST’s posted a fourth consecutive monthly loss, as the BofA Merrill Lynch US Treasury index fell 2.7%, the biggest decline since 2009.
Average yields on US investment grade corporate issues rose in November, but spreads narrowed as gains in UST outpaced the increase on corporates. US investment grade corporate bond average yields rose to 3.37% from 2.95% in October but the extra yield over UST fell to 1.0%. US high yield corporate bond average yields rose to 6.57% from 6.29% as the BloomBar US Corporate High Yield index lost 0.47% in November, posting its first monthly loss since January.
Global bonds retreated in November as the BloomBar Global Aggregate Index lost 4.0%, the deepest loss since the gauge’s inception in 1990. The average yield on the index climbed to 1.61% on November 23, from this year’s low of 1.07% reached on July 5. European bonds posted losses as 10-year yields on German bunds rose to 0.28% from 0.16%, which is up from -0.15% in September. Yields on similar maturity Italian bonds rose 33 bps to 1.99%, while Spain’s 10-year jumped to 1.55% from 1.20% in October. Japanese 10-year yields increased 7 bps to 0.03%, rising above zero for the first time since February.
The market’s rising expectations of a Fed rate hike helped drive emerging market bonds lower as the JPMorgan EMBI Global index of USD bonds declined 4.2%.
Disclaimers: The data contained in this report is provided from Asset Consulting Group (ACG). This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources. HighTower/GFP shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Securities are offered through HighTower Securities, LLC, member FINRA/SIPC/MSRB. HighTower Advisors, LLC is a SEC registered investment adviser.