Stocks were little-changed last week as the conference committee convened to reconcile the differences between the House and Senate tax bills. Several challenges remain, but momentum for a compromise remains strong; Republicans hope to have the bill on the president’s desk before Christmas. Financials, Industrials, and consumer-oriented stocks outperformed; these areas should benefit the most from tax reform and deregulation. Utilities was the worst performing sector as dividend-yielding strategies lose favor. Recent headlines highlight corporate deal-making: CVS Health officially announced an agreement to acquire Aetna for approximately $78 billion. And, reports re-surfaced of Disney’s interest in purchasing certain Twenty-First Century Fox assets, including the movie and television studios. The moves reflect changing industry dynamics as well as increased corporate confidence in the underlying strength of the economy. Indeed, November’s job growth, led by gains in private sector employment, exceeded analysts’ expectations. Wages disappointed with a lower-than-expected 2.5% year-over-year gain; yet, many economists expect accelerating wage growth, and higher inflation, as labor market conditions tighten.
Developments overseas also generated headlines; last week, the UK and EU achieved a breakthrough in the first phase of Brexit negotiations. The “divorce settlement” includes guarantees of the rights of EU citizens living in the UK; a deal to prevent a hard border between Northern Ireland (part of the UK) and EU member, the Republic of Ireland; and agreement on the payment of financial obligations owed by the UK to the EU. The breakthrough was significant, as failure to come to an agreement could have stoked fears of a disorderly break-up with potentially negative ramifications for the regional economy. Next week, EU leaders are expected to formally declare that “sufficient progress” has been made to advance to the next phase of negotiations on trade and transition matters; many anticipate that these discussions will be much more difficult. Meanwhile, the Euro zone composite PMI reached its highest level since 2010 with strong readings from Germany, France, Italy, and Spain. Elsewhere, China’s exports rose 12.3% while imports increased 17.7%. And, Japan’s third quarter GDP growth was revised higher to +2.5%, up from the preliminary estimate of +1.4%. The positive outlooks in Europe and Asia should help sustain global economic growth in 2018.
* Pacific Global Management
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.
Last Week's Headlines
1. November provided another strong month for new job hires, according to the latest report from the Bureau of Labor Statistics. Employment increased by 228,000 last month. Employment growth has averaged 174,000 per month thus far this year. Employment continued to trend up in professional and business services, manufacturing, and health care. The unemployment rate remained at 4.1%, and the number of unemployed persons was essentially unchanged at 6.6 million. The average workweek for all employees increased by 0.1 hour to 34.5 hours in November. The average hourly earnings for all employees rose by $0.05 to $26.55. Over the year, average hourly earnings have risen by $0.64, or 2.5%.
2. According to the Census Bureau, the international trade deficit increased $3.8 billion to $48.7 billion in October over September. The October increase in the goods and services deficit reflected an increase in the goods deficit of $3.8 billion to $69.1 billion and a decrease in the services surplus of less than $0.1 billion to $20.3 billion. Year-to-date, the goods and services deficit increased $49.1 billion, or 11.9%, from the same period in 2016.
3. The non-manufacturing (services) sector accelerated in November, but at a slower pace than in October. According to the Institute for Supply Management, the pace of growth slowed in business activity, new orders, employment, and prices.
4. In the week ended December 2, the advance figure for initial claims for unemployment insurance was 236,000, a decrease of 3,000 from the previous week's level. The advance insured unemployment rate remained at 1.4%. The advance number of those receiving unemployment insurance benefits during the week ended November 25 was 1,908,000, a decrease of 52,000 from the previous week's level, which was revised up 3,000.
Eye on the Week Ahead
This week, the Federal Open Market Committee formally meets for the final time in 2017 under chairperson Janet Yellen. Some observers predict the FOMC will raise the federal funds rate by 25 basis points to a range of 1.25%-1.50%. The target range hasn't reached 1.50% since the end of October 2008.
