|This is the "Navigator Weekly Commentary" for the week ending December 06, 2013. The full Navigator Newsletter is available through a password protected login on our web site.
Stocks snapped their recent losing streak as U.S. equity markets rallied, closing the trading session nicely higher. A stronger-than-expected November nonfarm payroll report and a jump in December consumer sentiment helped ease growing concerns about sooner-than-expected tapering of asset purchases by the Federal Reserve. Treasuries were modestly higher despite the upbeat data, which included the largest rise in consumer credit in five months and a larger-than-expected increase in personal spending. In equity news, American Eagle Outfitters Inc matched the Street's profit expectations, but offered disappointing guidance, while Big Lots Inc posted a wider-than-forecasted loss. J.C. Penney Co. Inc disclosed in a regulatory filing that it received an inquiry from the Securities and Exchange Commission, while Sears Holdings Corp announced that it intends to spin off its Lands' End business. Gold was higher, crude oil prices were mixed, while the U.S. dollar was nearly unchanged.
The Dow Jones Industrial Average (DJIA) closed 199 points (1.3%) higher at 16,020, the S&P 500 Index increased 20 points (1.1%) to 1,805, and the Nasdaq Composite gained 29 points (0.7%) to 4,063. In moderate volume, 671 million shares were traded on the NYSE, and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.27 to $97.65 per barrel, wholesale gasoline was $0.02 higher at $2.73 per gallon, and the Bloomberg gold spot price added $4.04 to $1,229.27 per ounce. The Dollar Index—a comparison of the US dollar to six major world currencies—was nearly unchanged at 80.27. Markets were mixed on the week, as the DJIA decreased 0.4%, the S&P 500 Index was flat and the Nasdaq Composite Index was 0.1% higher.
Stronger-than-expected manufacturing reports out of China, the U.K., the eurozone, and the U.S. were unable to support stocks in today’s session, as the surprising increase in domestic activity spurred the Fed-tapering debate, and early estimates showing a decline in retail sales over the Thanksgiving holiday tempered enthusiasm to push stocks lower. Meanwhile, Treasuries finished lower following the mixed news, which included a larger-than-expected increase in October construction spending, while crude oil prices and the U.S. dollar were higher, and gold traded lower. In other news from the equity front, Dow Chemical announced the separation of a significant portion of its chlorine business.
The retail sector remained in focus following the Thanksgiving holiday weekend, which saw many retailers open on Thursday and ramping up promotions to try to jumpstart the holiday shopping season. The National Retail Federation (NRF) is estimating that total spending over the period declined 2.9% year-over-year (y/y) to $57.4 billion.
Meanwhile, the Federal Reserve announced that it has not objected to re-submitted capital plans from Dow members JPMorgan Chase & Co. (JPM $57) and Goldman Sachs Group Inc. (GS $168). Both firms were required to submit new plans following the Federal Reserve's 2013 Comprehensive Capital Analysis and Review (CCAR), an annual review to ensure that large financial institutions have capital planning processes that account for their unique risks, and to help ensure that they have sufficient capital to continue operations throughout times of economic and financial stress. The CCAR found weaknesses identified in the two firms' capital planning processes. JPM and GS traded lower.
Finally, the major automakers reported U.S. November sales today, with General Motors Co. (GM $38) announcing an adjusted 9.3% year-over-year (y/y) rise, compared to the 10.0% increase that was anticipated by analysts surveyed by FactSet. Also, Ford Motor Co. (F $17) achieved an adjusted 3.1% gain in sales, just below the estimated 3.2% growth. The sales figures reflect an adjustment for November, which had one more day than a year ago. However, Chrysler posted an adjusted 11.6% y/y increase, well above the 6.5% that was estimated. Shares of F and GM traded lower.
In housing news, new home sales jumped 25.4% m/m in October, to an annual rate of 444,000 units, above the 429,000 pace expected by economists. Additionally, the Commerce Department released the figures for September, which were delayed by the government shutdown, showing a 6.6% m/m drop to an annual rate of 354,000 units, missing expectations for a 425,000 unit pace. For October, the median home price dipped 0.6% y/y and was down 4.5% m/m at $245,800.
Nonfarm payrolls rose by 203,000 jobs month-over-month (m/m) in November, compared to the 185,000 increase that economists surveyed by Bloomberg had forecasted, while the initial rise of 204,000 seen in October was revised lower to a gain of 200,000 jobs. Also, the combined net upward revision to job gains for October and September was 8,000. Moreover, excluding government hiring and firing, private sector payrolls increased by 196,000 in November, versus the forecast of a gain of 180,000, after expanding by an upwardly revised 214,000 in October, from the 212,000 that was initially reported. The job growth figures are derived from the Labor Department's survey of establishments, which showed broad-based gains, led by professional and business services, transportation and warehousing, health care, as well as manufacturing and construction, while federal government employment continued to decline. Elsewhere, the establishment survey showed average hourly earnings were up 0.2% m/m, matching expectations, and October's 0.1% gain was unrevised. Finally, average weekly hours rose to 34.5, inline with expectations, from October's unrevised 34.4 level.
Additionally, a separate survey of households revealed that the unemployment rate declined to 7.0%—the lowest in five years—from the 7.3% rate in October, compared to economists’ expectations of a decrease to 7.2%. The number of unemployed persons declined as those being temporarily laid off fell by 377,000, largely reflecting the return to work of federal employees who were furloughed in October due to the partial government shutdown. As of late, the drop in the unemployment rate had been attributed to a lower labor force participation rate—the share of the working age population in the labor force—which hit 62.8% in October, the lowest level since March 1978, per Bloomberg. However, in November, the larger-than-expected decline in the unemployment rate came even as the participation rate increased to 63.0%. Another piece of good news, the underemployment rate—total unemployed including discouraged workers and those working part time for economic reasons—fell to 13.2% from 13.8%.
Meanwhile, personal income declined 0.1% m/m in October, versus the 0.3% gain that economists had projected, and September's 0.5% rise was unrevised. However, personal spending rose 0.3% m/m in October, above expectations of a 0.2% increase, while September's 0.2% rise was unadjusted. The October savings rate as a percentage of disposable income fell to 4.8%, from September's upwardly revised rate of 5.2%.
Consumer credit, released in the final hour of trading, showed consumer borrowing expanded at a faster-than-expected pace during October, increasing $18.2 billion, compared to the $14.5 billion forecast of economists polled by Bloomberg. Meanwhile, September's figure was adjusted higher to an increase of $16.3 billion from the $13.7 billion originally reported. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $13.9 billion, while revolving debt, which includes credit cards, expanded by $4.3 billion.
Treasuries were slightly higher despite increased expectations that the Federal Reserve may begin tapering its asset purchases sooner than anticipated, with yields giving back some of their recent rally. The yield on the 2-year note was nearly unchanged at 0.30%, while the yields on the 10-year note and the 30-year bond dipped 2 basis points to 2.86% and 3.89%, respectively.
The Navigator Team has made no changes to our Fidelity or Vanguard oriented model portfolios.
Looking to Next Week
The US economic calendar next week will be fairly light, while investors will be awaiting the Fed meeting on December 17-18. Releases will include advance retail sales, the NFIB Small Business Optimism Index, the JOLTS job openings report, wholesale inventories, the Import Price Index, business inventories, and the Producer Price Index.
Thank you for being a loyal Navigator reader, and enjoy your weekend.