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Weekly Insights

Week of November 30th, 2015

Weekly Market Recap
Start the week off right with this one-page snapshot of headlines and market performance.
Dr. David Kelly’s weekly podcast
Start every week by listening to Dr. David Kelly’s commentary on the markets and economy.
Updated as of: 11/30/15
Weekly Economic Update
Stay current on the economic landscape and note changes from week-to-week.  
In its second estimate of 3Q 2015 GDP, the BEA showed the U.S. economy expanding at a 2.1% q/q saar pace. While the revision restated growth up from 1.5%, the underlying sources of growth show a larger inventory overhang than initially estimated. Inventory accumulation in the first half of the year deducted 0.6% from third quarter growth, revised up from the initial -1.4% estimate. However, the lower-than-expected negative impact from inventory accumulation means a stronger headwind to future growth as the pace of inventory accumulation returns to average levels. Consumption remained strong in 3Q, with consumer spending up 3.2% y/y following a 3.3% increase in 2Q.
The October employment report saw the unemployment rate fall to 5.0% and last month's job openings number rose to 5.5 million (the second highest number on record), presenting further evidence that the U.S. labor market is nearing full employment. Such confirmation of lessening slack should add ammunition to the argument for the Fed to raise rates for the first time since 2006 at the December meeting.
As the earnings season comes to a close, two of the major themes this year, falling energy prices and a high U.S. dollar, certainly continued to take a bite out of earnings. Our estimate for y/y S&P 500 earnings per share in 3Q has now fallen 15.2%, but ex-energy has risen by 1.9%. The high dollar has hurt foreign sales, with only 35% of companies beating revenues estimates. Looking ahead into 2016, these themes should continue to play out, but the hit from low prices should begin to roll off and lead to stronger earnings growth.
CPI firmed in October as headline consumer prices increased 0.2% m/m, in line with consensus expectations, helped by strength in oil and food prices. Headline inflation is now up 0.2% from October 2014, held back largely by the energy index, which is down 17.1% in the same time. Core CPI inflation maintained a solid 1.9% y/y growth and improved by 0.2% m/m with core services prices increasing 0.3%, driven by a 0.8% increase in medical care services. With the drag from energy prices set to fade in early 2016, headline inflation should move closer to the Fed's 2.0% mandate in the medium term.
The FOMC left rates unchanged in October and indicated in its statement that it is focusing more on near-term incremental improvement in the U.S. economy rather than longer-term trends. It reduced its emphasis on international developments and upgraded its assessment of the U.S., stating that although the "pace of job gains slowed," labor market slack has still diminished. It included a reference to "its next meeting," and while this is not a material change from previous statements, the Fed seems to be preparing investors by striking a more hawkish tone and implying that a December rate hike is still on the table.
  • Volatility caused by the timing and communication of Fed tightening.
  • Concerns about a slowing Chinese economy and its ripple effects on emerging markets.
  • Deflation worries in other developed economies outside of the U.S.
  • Volatility caused by sharp swings in commodity prices and exchange rates.
  • A slow upward trend in earnings (despite the temporary drag from cheap oil and a high dollar), coupled with low interest rates, still make stocks look attractive in relative terms.
  • Cyclical and small cap stocks are generally favored in a rising interest rate environment.
  • High yield bonds look more attractive than Treasuries, but a diversified approach to fixed income investing seems appropriate given likely Fed tightening in 2015.
  • Despite disappointing returns due to a stronger dollar in 2014, international exposure is still warranted given growth prospects abroad.

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