Economic Update 11-30-2015

• In a short holiday week, economic data was mixed, with durable goods and housing statistics generally higher, while consumer confidence indicators fell for the month

• Markets experienced a typical tame holiday week, with U.S. large-cap stocks coming in flat, small caps doing a bit better, and foreign stocks mixed.  Bonds earned small gains with interest rates declining in the middle portion of the yield curve.  Commodities were also flattish on net, with oil ending the week close to where it started, but gold continued its recent declines.

In an abbreviated Thanksgiving week, equities ended unsurprisingly flat, although Turkey shooting down a Russian jet added some unexpected drama in a part of the world where geopolitical surprises aren’t rare.  On the week, consumer staples and energy experienced the sharpest gains, while utility stocks fell.  Small caps surprised by sharply outperforming large-cap stocks on the week, but continue to trail by several percent on a year-to-date basis.

While stock-specific, Pfizer’s announced merger with Allergan (a $160 bil. deal) would be the largest pharma transaction ever as well as being potentially the largest ‘tax inversion’ deal—the latter being the primary point of focus.  Essentially, Allergan would serve as acquirer and relocate the firm to Ireland to save taxes.  This isn’t the first company to do this by any means, but larger transactions like this have raised the eyebrows of regulators and politicians in an environment where tax reform (especially on the corporate side) has been slow to happen.

European stocks fared well on the week, as a survey of business growth was shown to have hit a 4-year high, with German manufacturing and services and improved employment adding to hopes for recovery sooner than later (Euro area PMI rising to over 54, in decent expansionary territory).  Gains in Euro currency terms were offset somewhat by dollar strength, which tempered foreign stock returns.  Towards the end of the week, Chinese stocks declined dramatically as several industrial companies reported a major decline in profit year-over-year and regulators decided to ban derivatives financing for equity trading, in one of perhaps several steps of tightening risk-taking rules for brokerage firms.  Overall, emerging markets were among the weaker performers, with Turkey losing nearly -10% upon geopolitical concerns and Latin America also experiencing losses on the week.

U.S. government and investment-grade corporate bonds gained slightly as interest rates fell, with the mid/5-year area of the curve most heavily affected.  Most other segments were relatively tempered in performance, returning a few basis points above or below zero for the week.  Foreign-currency denominated European debt fared best on the week with lower interest rates, while emerging market local bonds fell about a percent, lagging the pack.

Real estate indexes generally gained about a percent, outperforming other equities, led by U.S. lodging/resorts and health care.  Asian and European REITs all underperformed, especially in USD terms, perhaps affected by geopolitics in Eastern Europe and carryover from the Paris terrorist attacks.

Commodities were little changed on the week, with the energy complex surprisingly flat on net, but precious metals falling by nearly -2%, led by declines in gold, which is expected to look much less attractive to safety-seeking investors in a regime of higher interest rates on Treasuries.  Crude oil jumped almost $2/barrel on geopolitical events in the Middle East before falling back to just under $42 by Friday.  Saudi Arabia has agreed to work with OPEC and non-OPEC countries to stabilize oil prices.  OPEC is meeting in early December, and trader worries over possible production cuts to boost prices appears to be balancing the cross-currents of high supplies a bit.

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.                                                                              

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.