Market Commentary: Market Recap
Market Update for the Month Ending November 30, 2014
Strong month for U.S. markets
After a volatile October, U.S. stock markets turned in a very strong November, with almost all indices showing strong gains. The Dow Jones Industrial Average was up 2.86 percent for the month, while the S&P 500 Index gained 2.69 percent. The Nasdaq was the champion again, rising 3.47 percent. The best-performing stocks were those of large companies, with smaller firms showing much smaller gains or even losses in the case of the smallest stocks.
Most market gains were driven by strong fundamentals. Per FactSet, as of November’s end, with 99 percent of companies reporting in the S&P 500, more than three-quarters had beaten estimated earnings and almost three-fifths had reported higher-than-expected revenues.
Markets have also been well supported technically. All major indices are well above their 200-day moving average trend lines, a sign of continued strength.
U.S. fixed income did well, with the Barclays Capital Aggregate Bond Index up 0.70 percent for November. Performance was driven by a decrease in rates, as the U.S. Treasury 10-year bond yield dropped during the month from 2.36 percent to 2.18 percent.
International markets did not fare as well. The MSCI EAFE Index gained just 1.36 percent, and the MSCI Emerging Markets Index posted a 1.12-percent decline for November. Technically, both indices are trading below their 200-day moving averages, suggesting potential further weakness.
U.S. economy strong but exhibiting signs of slowing
U.S. economic growth for the third quarter was revised upward to 3.9 percent. Retail sales growth continued at higher-than-expected levels, with spending adjusted for lower gasoline prices.
Employment numbers continued to show substantial growth. The Employment Cost Index grew at very high levels for the second month in a row, and the level of voluntary quits rose to a six-year high. Business confidence also remained high.
Coming after the end of the Federal Reserve’s bond-buying program in October, November’s results were subject to concern and uncertainty. One potential area of concern was reports of slowing toward month-end. Consumer and business confidence surveys reported pullbacks, and employment figures showed some declines.
Much of this can probably be attributed to weakness elsewhere in the world, as export markets have weakened. The question going forward will be whether the U.S. can continue to grow in the face of economic weakness around the globe.
Rest of world continues to weaken
Japan returned to recession and announced a greatly expanded quantitative easing program designed to create inflation and reduce the value of the yen. Similarly, Europe, although not in recession yet, has shown very slow growth levels and is approaching a decision about a quantitative easing program. Other countries with economic worries include Russia and China.
U.S. recovery moves forward despite headwinds
The consequences of these factors will be to hurt U.S. exports, either through lower sales or a stronger dollar. Exports are, however, a relatively small part of the economy, so damage should be limited.
Further limiting the damage will be the positive effects of a stronger dollar. One of the largest of these is to make imports, especially oil, cheaper in dollar terms (see chart).
The Steep Decline in Oil Prices Means More Money in the Pockets of U.S. Consumers
Positive trends should persist through year-end
Despite the many concerns in the rest of the world, and the very real risks to the U.S. economy and markets, the signs at this point are positive. Trends for financial markets, employment, and economic growth are all positive. Moreover, even the risk factors have offsetting advantages for the U.S. Still, the positive conditions have led to U.S. markets being richly priced and open to the possibility of a correction.
A diversified portfolio remains the best solution for most investors, with regular rebalancing to harvest gains from fully priced areas and to invest in areas that are more attractively priced. As always, a long-term perspective remains the best one to adopt in an uncertain world.
All information according to Bloomberg, unless stated otherwise.
Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners.