Monthly Economic Update for January, 2016
Tom Cymer , CFA, CFP®, CRPC® Presents:
“We can draw lessons from the past, but we cannot live in it.”
– Lyndon Johnson
The new year may be the right time to rebalance your portfolio, so that your asset allocation can stay aligned with your risk tolerance and investment objectives. During 2015, some of your asset categories may have shifted away from your target allocations.
It can make food for the whole world, but it does not eat and will never spend time on this planet. What is it?
Last month’s riddle:
Last month’s answer:
THE MONTH IN BRIEF
DOMESTIC ECONOMIC HEALTH
December saw the Conference Board consumer confidence index advance 3.9 points to a mark of 96.5. The University of Michigan’s household sentiment index ended the month at 92.6, slightly improved from its initial December reading of 91.8.4,5
Commerce Department data showed both consumer spending and consumer incomes rising 0.3% in November. Core retail sales (minus auto buying) improved 0.4% in that month as headline retail sales increased 0.2%; October had seen both indicators rise just 0.1%.5,6
The Labor Department’s December jobs report showed wages up 2.3% through the 12 months ending in November – in the eyes of some analysts, a statistic contributing to the Fed’s decision to hike. Payrolls swelled with 211,000 new hires in November, and September and October job gains were revised up to leave the average monthly hiring total at 218,000 for that 3-month period. The headline unemployment rate stayed at 5.0% in November, but the U-6 total unemployment rate ticked up to 9.9%.7
November’s Consumer Price Index was flat, with core consumer prices increasing 0.2%; that left the headline CPI up 0.5% and the core CPI up 2.0% year-over-year. Both the headline and core Producer Price Indexes rose 0.3% in November, offsetting a 0.4% dip for the headline PPI and an 0.3% fall for the core PPI in the prior month.6,8
December also brought the last estimate of Q3 growth from the Bureau of Economic Analysis. It was an unexceptional 2.0%, down from 2.1% in the previous estimate. In November, the Institute for Supply Management’s factory PMI came in at 48.6, falling an alarming 1.5 points from October and indicating sector contraction. ISM’s service sector PMI also fell sharply, losing 3.2 points for November but remaining in good shape at 55.9. Industrial output had declined 0.6% in November and was 1.2% underneath the level of a year ago according to the Federal Reserve; durable goods orders were flat for November, core durable orders down 0.1%.5,8,9
GLOBAL ECONOMIC HEALTH
Manufacturing PMIs from the eurozone and China were in marked contrast. The Markit eurozone PMI came in at 53.1 for December, up 0.3 points from its November level. China’s official PMI showed sector contraction for a fifth straight month in December at 49.7, and the private-sector Caixin manufacturing PMI was lower at 48.9. China’s official service sector PMI reached a 16-month peak of 54.4 last month, however, corresponding to the nation’s effort to transition from an economy rooted in manufacturing and investment to one driven by consumer spending and service industries.12,13
Europe saw some major retreats last month. Italy’s FTSE MIB slipped 5.72%, Russia’s RTS 10.63%, France’s CAC 40 6.47%, Spain’s IBEX 35 8.11%, and Germany’s DAX 5.62%. The United Kingdom’s FTSE 100 gave back but 1.79%.1
Around the rest of the world, there were mixed gains and losses: Nikkei 225, -3.61%; Kospi, -1.54%; Shanghai Composite, +2.72%; Manila Composite, +0.36%; Jakarta Composite, +3.30%; Hang Seng, -0.37%; ASX 200, +2.50%; KSE 100, +1.74%; Sensex, -0.11%; TSX Composite, -3.41%; IPC All-Share, -1.02%; Bovespa, -3.92%. Among consequential indices, the notable 2015 performers per region were the Shanghai Composite at +9.41%, Argentina’s Merval at +36.09%, and Ireland’s ISEQ at +30.00%.1
Gold futures had another down month in December. The yellow metal lost 0.50% to end the year at $1,060.50 on the COMEX. Gold lost 10.53% for the year. A 1.21% December slip left silver futures at $13.82 on December 31; silver notched an 11.69% loss for 2015. Platinum and copper both posted impressive December gains, the former rising 7.25%, the latter 4.14%.15
December saw the U.S. Dollar Index decline 1.50%, but fuels and crops benefitted little from that descent. With OPEC nations declining to reduce production, NYMEX crude futures lost another 11.06% for the month, finishing 2015 at just $37.07 a barrel. Oil fell hard on the year, sinking 30.98%. Unleaded gasoline gave back 5.30% in December, heating oil 14.49%. Natural gas futures rose 5.38%. Coffee was December’s best performer among major crops, advancing 7.42%; sugar was next, up 3.98%. Smaller gains came for wheat (2.23%) and cotton (1.02%). Soybeans lost 1.19%, corn 1.92%, and cocoa 3.57%.15,16
Mortgage rates climbed appreciably during December. In Freddie Mac’s November 25 Primary Mortgage Survey, the average interest rate on the 30-year fixed rate mortgage was 3.95%; by December 31, it was 4.01%. The average interest rate on the 15-year FRM was 3.24% at year’s end, up from 3.18% on November 25. In the same interval, average rates on 5/1-year ARMs went from 3.01% to 3.08% and average rates for 1-year ARMs rose from 2.59% to 2.68%.18
Looking at indicators geared toward the near future, the pending home sales index maintained by the NAR fell 0.9% for November. That negative was offset by two positives: a 11.0% climb in building permits and a 10.5% surge in housing starts in the year’s eleventh month.4,19
LOOKING BACK…LOOKING FORWARD
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.
As January begins, investors are wondering how much strength remains in the bull market. Was 2015 just a pause? The month began with the S&P 500 trading at 22.5x reported earnings, higher than at the conclusion of nine of the past ten bull markets. Is there more room to run? Some analysts are marveling how well equities held up last year in the wake of plummeting oil prices, terrorism shocks, and the volatility in Chinese stocks. Given that wage growth is picking up, hiring is strong, and many economic indicators are decent-to-positive, the hope is that a resilient U.S. economy can weather any prolonged slowdown in the emerging markets, and that higher interest rates exert little drag on stocks in the months ahead. Will the first month of the year show renewed strength and confidence from the bulls? With little if any hints of a downturn on the horizon, we can hope to see just that.23
UPCOMING ECONOMIC RELEASES: The rest of January unfolds as follows in terms of news items: the minutes from the December Federal Reserve policy meeting, the December ADP employment change report, the December ISM service sector PMI and November factory orders (1/6), the December Challenger job-cut report (1/7), the Labor Department’s December employment report (1/8), a new Federal Reserve Beige Book (1/13), December retail sales and industrial output, December’s PPI, November business inventories and the preliminary January University of Michigan household sentiment index (1/15), December’s CPI and December housing starts and building permits (1/20), the December Conference Board leading indicators index and December existing home sales (1/22), a new Conference Board consumer confidence index and the November S&P/Case-Shiller home price index (1/26), a Federal Reserve interest rate decision and December new home sales (1/27), December durable goods orders and pending home sales (1/28), and to close out the month, the University of Michigan’s final January household sentiment index and the first estimate of Q4 GDP from the Bureau of Economic Analysis (1/29). The December personal spending report will arrive February 1.
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