Markets were mixed Last week, with small and mid-cap stocks gaining while large cap stocks were mostly unchanged. Tax reform once again dominated headlines: the House passed its version of the legislation, while the Senate bill advanced out of the Finance Committee on a party line vote; the Senate may schedule a vote in two weeks. Retailers outperformed; Wal-Mart’s digital and e-commerce initiatives helped produce a +2.7% increase in same-store-sales, the company’s best quarterly performance since 2009. Traditional “brick-and-mortar” retailers are figuring out how to use their physical stores as an advantage in gaining, and retaining, customers in an increasingly online world. Energy-related stocks were relative laggards as weekly inventory levels unexpectedly rose; crude oil prices, though, held firm for the week. Meanwhile, economic data remain broadly positive. A better-than-expected industrial production report confirmed the accelerating momentum in the industrial economy; and, solid housing and retail sales data point to ongoing strength in the consumer economy.
* Source: Pacific Global Investment Management Company
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Market Week
In addition to the potential for tax reform, deregulation remains a meaningful driver for improved business confidence. This week, the Senate discussed a bipartisan agreement to relax several banking regulations enacted following the 2008 financial crisis. Included among these was a higher threshold for the designation of Systemically Important Financial Institution (SIFI) which triggers more strict regulatory oversight; mid-sized, regional banks, in particular, would stand to benefit from the proposed change. On Wednesday, Consumer Finance Protection Bureau (“CFPB”) Director Richard Cordray announced that he would resign at the end of the month. His replacement, which would be appointed by President Trump, may well revisit the Bureau’s mission.
Third quarter earnings season is nearing an end; thus far, 480 companies in the S&P 500® Index have reported results. Of these, 67% have met or exceeded analysts’ sales estimates while 82% have met or exceeded analysts’ earnings per share (EPS) estimates. Sales are now expected to have increased 5.9% for the quarter, while earnings are expected to have gained 6.3%. Excluding insurance companies, whose earnings were severely impact by Hurricanes Harvey and Irma, EPS would have increased by more than 10%. Early estimates for the fourth quarter anticipate EPS growth of 9.9% on a 6.3% expansion in sales. Indeed, corporate earnings momentum appears to be accelerating heading into 2018.
Source: Pacific Global Investment Management Company
Last Week's Headlines
1. Prices producers receive for goods and services climbed 0.4% in October. This gain follows a 0.4% increase in September and a 0.2% jump in August. Over the past 12 months ended in October, producer prices are up 2.8% — the largest rise since an advance of 2.8% for the 12 months ended February 2012. Prices less foods, energy, and trade services rose 0.2% for the month and have increased 2.3% over the 12 months ended in October. Generally, as producer prices rise, these increases get passed through to consumers.
2. While producer prices have risen, that increase hasn't been reflected in consumer prices — at least not yet. For October, consumer prices rose a scant 0.1%, according to the Consumer Price Index. This follows a 0.5% price jump in September. Core prices, which excludes food and energy, increased 0.2% for the month. The CPI rose 2.0% for the 12 months ended in October, a smaller increase than the 2.2% increase for the period ended in September. Core prices increased 1.8% over the past 12 months.
3. Soft consumer prices may be encouraging increased consumer purchases as retail sales were $486.6 billion in October, up 0.2% from September. Sales at the retail level are up 4.7% over the last 12 months.
4. October, the first month of fiscal 2018 for the federal Treasury, saw a monthly deficit of $63.2 billion. Government receipts for the month totaled $235.3 billion, while outlays totaled $298.6 billion. By comparison, the deficit for October 2016 was $45.8 billion.
5. According to the Bureau of Labor Statistics, import prices advanced 0.2% in October after increasing 0.8% in September. Excluding fuel import prices, which swung sharply higher (1.4%) last month, import prices only managed a 0.2% monthly increase. Year-on-year, import prices, excluding petroleum, have risen only 1.4%. Export prices recorded no change in October, after increasing 0.7% in September. The price index for agricultural exports increased 1.9% in October, the largest monthly rise since a 2.5% advance in June 2016. Excluding agriculture, export prices actually declined 0.3% in October.
6. Industrial production rose 0.9% in October, and manufacturing increased 1.3%. The index for utilities rose 2.0%, but mining output fell 1.3%, as Hurricane Nate caused a sharp but short-lived decline in oil and gas drilling and extraction. Even so, industrial activity was boosted in October by a return to normal operations after hurricanes Harvey and Irma suppressed production in August and September.
7. October was a very solid month for new home construction. According to the Census Bureau, building permits were up 5.9%, housing starts increased 13.7%, and housing completions jumped 12.6% over September.
8. In the week ended November 11, the advance figure for initial claims for unemployment insurance was 249,000, an increase of 10,000 from the previous week's level. The advance insured unemployment rate fell slightly to 1.3%. The advance number of those receiving unemployment insurance benefits during the week ended November 4 was 1,860,000, a decrease of 44,000 from the previous week's level, which was revised up 3,000. This remains the lowest level for insured unemployment since December 29, 1973, when it was 1,805,000.
Eye on the Week Ahead
Thanksgiving week is relatively quiet in terms of economic news. The report on existing home sales for October follows on the heels of September's positive returns. Another important economic report on orders for durable goods is also out this week. For the year, new orders placed with domestic manufacturers are up 8.3% compared to 2016.
