In the markets:
A strong rally on Friday moved the major indexes back into positive territory for the week as the closing weekly results hid the underlying intraweek volatility. The Dow Jones Industrials rallied 369 points on Friday to end the week up +49 points (+0.28%) to 17,847. The Nasdaq Composite +14.75 points (+0.29%) to close at 5,142. The Large Cap S&P 500 index remained near flat adding a single point (+0.08%). However, two indexes continue to lag the large caps--the Mid Cap S&P 400 declined -1.35% and the Small Cap Russell 2000 lost -1.58%. Canada’s TSX lost a smidge at -0.07%.
International markets were mixed on the week, with Europe’s major markets jolted to the downside by an unexpectedly unambitious stimulus announcement by the European Central Bank’s Chairman Mario Draghi. Market expectations had been for a much more aggressive stimulus announcement than Draghi delivered. The German DAX led the major indexes to the downside losing over -4.8%. France’s CAC 40 declined -4.37%. The United Kingdom’s FTSE ended the week down -2.15%. Asia and some emerging markets were better as China’s Shanghai Stock Exchange rose +2.58%, Hong Kong’s Hang Seng gained +0.76%, and Brazil moved up by +0.6%.
In commodities, precious metals had strong gains as Silver rose +3.38% to $14.54 an ounce and Gold added $29.70 (+2.8%) to end the week at $1,085.80 an ounce. Oil, however, came under further pressure losing over 3.9% to finish at $40.14 for a barrel of West Texas Intermediate crude oil.
For the month of November, US equity markets were flat-to-up, but pretty much everywhere and everything else was down. Hardest hit among global equity markets was Emerging International at -2.52%, and it is no coincidence that commodity markets were really dinged during November, hitting Emerging International equity markets the hardest. Gold was down -6.75% for November, silver -9.19%, and oil -12.5%
In US economic news, the monthly Non-Farm Payrolls (NFP) report was stronger than expected as the US added 211,000 jobs in November, more than the 190,000 expected. The unemployment rate remained at 5% as the labor force participation rate also moved higher. Construction and retail sectors led the way with a second strong month of hiring. However, manufacturing jobs fell by 1,000. Average hourly earnings rose almost +0.2% last month. The jobs report appears strong enough to give the Federal Reserve the green light to raise interest rates at its next meeting.
Weekly initial jobless claims rose by 9,000 last week to 269,000 according to the Labor Department. Initial claims remain near a 4-decade low. Continuing claims rose by 6000 to 2.16 million in the week ended November 21.
ADP’s private-employer survey showed those employers added 217,300 jobs last month, more than expected. The 204,000 jobs in the service industries accounted for almost all of the gain. Manufacturing jobs showed a very small rise of 6,000, but overall remain down in 2015, which echoes the theme from the NFP of “strong services, weak manufacturing”. Construction employment gains also slowed to 16,000, according to ADPP, roughly half the rate of the prior two months.
Employment firm Challenger, Gray & Christmas reported that employers announced plans to lay off 30,953 workers in November, the lowest since September of last year. Announced plans fell 39% from October and were down 13% versus this time last year. However, year-to-date layoffs of 574,888 make 2015 the worst year for layoffs since 2009. Leading the way is Hewlett-Packard, which plans to cut 30,000 jobs. Oil services firms Schlumberger, Halliburton, and Baker Hughes have all cut tens of thousands of jobs with Schlumberger recently stating that it plans to cut more.
The Chicago-area manufacturing Purchasing Managers Index (PMI) for November missed estimates and fell into contraction at 48.7 (readings below 50 are in contraction territory). November’s reading was a sharp decline from October’s 56.2. Estimates had been for a reading of 54. New orders fell along with backlog orders that showed their 10th straight month of decline. A competing measure, the Institute for Supply Management (ISM) survey, agreed with the PMI, reporting that US manufacturing activity fell into contraction to 48.6 last month, nearly 2 points below the consensus estimate and the lowest level since June 2009. The ISM index had hovered around 50 since September as US manufacturers have been struggling with the impacts of a strong dollar, a slumping oil market, slowdowns in major international economies, and inventory overhang.
By contrast, ISM’s US service-sector index came in at 55.9, indicating that the U.S. service sector still remains in growth mode. However, this is the lowest reading since May, and below expectations.
Federal Reserve Chairwoman Janet Yellen this week again signaled that a December rate hike is likely in testimony before lawmakers after the European Central Bank extended its asset buying program. Yellen stated “U.S. economic growth is likely to be sufficient over the next year or two to result in further improvement in the labor market”, which supports her earlier comments that a rate hike is still likely at the December 15-16 meeting. Yellen stressed, however, that rate hikes would be gradual.
In the Eurozone, the European Central Bank opened its money tap only slightly on Thursday after previously indicating a substantial move would be required to force the economy out of its slump. Instead of expanding its asset purchases beyond the roughly $66 billion per month, the ECB pushed back the purchase program’s earliest end date by 6 months. It left its key lending rate unchanged but the interest paid on assets left overnight at the ECB dropped further into negative territory, from -0.2% to -0.3%. European stocks instantly sold off 2-3% on the news.
October Eurozone consumer prices rose just +0.1% versus a year earlier, below expectations. Core inflation, at 0.9%, also missed views.
In China, the official manufacturing index fell to a 3-year low in November, down -0.2 point to 49.6, according to the National Bureau of Statistics. The reading was slightly below forecasts and pushed further into contraction territory. However, the service sector index rose a half point to 53.6, further evidence that China is rapidly shifting from an export-focused industrial economy to one relying on services and domestic demand. While industrial production and capital spending data have been weak, retail sales growth has remained robust. Apple, Starbucks, and Nike have all shown strong sales growth in China.
Finally, as reported above key gauges of US manufacturing activity have slipped back into contraction territory. Investors, however, still appear to be fixated on the ever rising major market indexes—the Dow Jones Industrials and the S&P 500. Should investors be less blasé about this development? Or can the manufacturing woes be safely ignored? The following chart from economics reporting firm Factset shows that each of the last two big bear markets were preceded by a drop of the ISM manufacturing index into contraction territory, in August of 2000 and December of 2007. Interestingly, each was also preceded by a brief dip into contraction a few months before. The same pattern has now emerged, although the “brief dip” this time was more than a few months ago. Given this history, perhaps investors would be wise to be less blasé.
(sources: Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 3-5 source W E Sherman & Co, LLC)