In the markets:
All major U.S. indices were green as the stock market was able to manage a second consecutive weekly
advance. The LargeCap S&P 500 climbed +1.6%, extending its two-week rally to +4.5% and is now up
+0.4% for the month. The Dow Jones Industrial Average gained 247 points to end the week at 16,639,
up +1.5%. MidCaps and SmallCaps also fared well as the S&P 400 MidCap index rose +2.7% and the
SmallCap Russell 2000 index also gained 2.7%. The defensive Dow Jones Utilities barely managed a
positive close, up just +0.07%, while the Dow Jones Transports added +1.63%.
In international markets, Canada’s TSX was essentially flat, down just -0.12%. European markets were
generally higher for the week in the +1.2 to +2.5% range, while major Asian markets were mixed, with
the biggest loser being the China Shanghai Index, down -3.25%. Developed markets as a whole were flat
for the week, and Emerging markets were down -0.6% on average for the week.
In commodities, crude oil surged more than +10%, up +$3.12 to $32.84 on news of supply disruptions in
Iraq and Nigeria. Precious metals lost their upward momentum as Gold ended the week at $1222.80 an
ounce, down -0.31%, and silver plunged more than -4.3% to $14.69 an ounce.
In U.S. economic news, GDP for the fourth quarter was revised upward to +1.0% growth by the
Commerce Department, better than the +0.7% gain initially reported. For the year, the economy grew a
very modest +2.4%, the same as in 2014. The report was a surprise to Wall Street, which had expected a
downward revision. However on a not-so-positive note, the report reveals that the boost in growth
resulted from a smaller decline in inventories and weaker imports.
New claims for jobless benefits rose 10,000 to 272,000 last week, according to the Labor Department.
Continuing claims decreased 19,000 to 2.253 million. Despite the latest increase weekly initial claims
remain in the lower half of the 250,000 to 300,000 range they have been in for 19 months.
The National Association of Realtors reported that existing home sales rose in January to an annualized
5.47 million rate, a six month high. Home sales were up +11% from a year ago, the biggest annual gain
since July, 2013. Sales were up +0.4% from last month. Nationally, the median home price rose +8.2%
from a year ago, the largest since last spring. The S&P/Case-Shiller index showed year-over-year price
gains of +5.7% in December, in its 20-city index. But new-home sales fell in January to a seasonally
adjusted rate of 494,000 housing units, according to the Commerce Department. This was a bigger
decline than economists had expected. New home sales fell -5.2% compared with a year earlier and are
down -9.2% from December’s rate. The median sales price for new homes was $278,800, while the
average sales price was $365,700. The median price is down -4.5% versus a year earlier, the biggest
year-over-year decline since January 2012. The seasonally adjusted inventory of new homes for sale
was 238,000, representing a supply of almost 6 months at the current rate.
The Conference Board reported that consumer confidence fell -5.6 points to 92.2, missing forecasts by a
wide margin. It was the lowest reading since last summer. Analysts suggest that recent market
weakness and slowing job growth were behind the reading. In the report, the “present situation” subindex declined -4.5 points to 112.1. Respondents who stated current business conditions were good
decreased to 26%, while those describing current business conditions as bad rose to 19.8%. The 6.2%
spread between the two was the smallest since last August. The expectations gauge sank -6.4 points to
78.9, a two year low. Only 12.2% of consumers expect more jobs in the future versus 17.2% who expect
fewer jobs. Nonetheless, Lynn Franco, Director of Economic Indicators at The Conference Board, stated
“continued turmoil in the financial markets may be rattling consumers, but their assessment of current
conditions suggests the economy will continue to expand at a moderate pace in the near term.”
Consumer spending - the backbone of the U.S. economy - remains strong, rising +0.5% in January and
beating analyst forecasts according to the Commerce Department. Personal income also beat
projections rising +0.5%. The Federal Reserve’s favorite inflation gauge, the core personal consumption
expenditures index, rose +0.3%, which was the biggest monthly gain in four years. The +1.7% annual
gain for the personal consumption expenditures index was the most since July 2014, and nearing the
Fed’s stated 2% target.
Good news for manufacturing has been rare in recent months. We got some this week, in the form of
orders for durable goods, which jumped +4.9% last month - the most in ten months and handily beating
forecasts. Economists had been expecting a +2% gain. Year-over-year, durable goods orders rose a lessrobust +0.6%.
In international economic news, the Conference Board of Canada predicts little economic growth over
the coming years for Canada. The report states that the global downturn in mineral prices has hit the
Canadian economy particularly hard and it will be years before the territories regain their financial
footing.
In the Eurozone, the president of Germany’s Bundesbank gave a positive outlook for the global economy
on Wednesday, but stated that “central banks shouldn’t be overburdened with creating economic
growth.” “The global recovery is on track,” he added. His cheerleading speech followed a report
Tuesday that showed German exports dropped -0.6% in the fourth quarter for the first time since 2012.
Business sentiment in Germany fell to the lowest level in more than a year.
In France, French Finance Minister Michel Sapin stated that the global economy faced a series of
difficulties but described them as “surmountable”, and warned against investor overreaction – and
against the UK exiting the European Union.
In Asia, a long-standing issue facing the world’s third-largest economy – Japan - has finally manifested
itself in a visible way. The official population of Japan as of Oct. 1 is 127.1 million, which is down by
947,000 or -0.75% from the previous census in 2010; this is the first-ever decline since the census
started in 1920. Even during World War II the population rose. A UN report last year projected that
Japan’s population would fall to about 83 million by 2100. The average number of children a Japanese
woman will bear in a lifetime – just 1.42 as of 2014 – is far below the replacement rate of 2.1. It doesn’t
help that Japan keeps a tight lid on immigration, which business leaders are calling to be loosened, but
Prime Minister Shinzo Abe is showing no signs of changing existing policy.
The Japanese census figures are likely to further Japan’s decades-long stagnation. From a government
standpoint, further stimulus packages are likely. The declining Japanese population is particularly visible
in many rural prefectures. While Tokyo’s population grew +2.7% from 2010 to 2015, the population in
39 of Japan’s 47 prefectures declined.
Finally, Rob Arnott, the widely-followed financial guru and chairman of investing firm Research Affiliates,
recently put out a rather striking research note exhorting investors to “dump quality stocks and buy
value stocks”. He states that stocks that bear high-quality characteristics such as high profits, and strong
balance sheets have now become too expensive in relation to the rest of the stock market. Meanwhile,
value stocks, which traditionally mean boring companies with low future growth prospects but still
cheap in relation to profits and dividends, are, according to Arnott, trading at a significant discount to
historical norms. Arnott’s call is interesting given the fact that he is the best-known and one of the
earliest proponents of “smart beta” investing, which targets known anomalies in market returns that
favor low volatility, high quality, and higher momentum stocks, among other characteristics. So why did
he put out the “sell quality” call? Perhaps because his proselytizing in favor of high quality has been too
successful leading to too many buyers in this now-overcrowded space, and inviting a reversion to the
mean.
(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com,
ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics
Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC,
361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)