November was another good month for investors. The equity markets were up again this month as the major domestic and global indices we follow ended positive. The bond market ended slightly negative while the CRB Commodity Index continued to trend higher after a hard start to the year. The US dollar, still down for the year, has been stable in recent months.
U.S. & International Stock Index Returns
|Index November 2017 Year-to-Date|
|Dow Industrials 4.53% 22.82%|
|S&P 500 3.23% 18.26%|
|S&P 400 (Midcap) 3.86% 14.37%|
|S&P 600 (Small Cap) 3.69% 12.53%|
|MSCI World 2.31% 18.62%|
|MSCI EAFE 2.75% 19.96%|
|Bloomberg Agg. Bond 3.07%|
|CRB Commodity Index (1.74%)|
|US Dollar Index (8.98%)|
All data as of 11/30/2017
Equities continue to impress as November produced strong, positive gains in all the stock market indexes we follow. The bull market, which earlier in the year was confined to large cap companies, is now a broad-based rally with strong participations from small-cap and mid-cap stocks. Global equities followed suit with both the MSCi World and MSCI EAFE posting gains of greater than 2% for the month.
The main driver for US equities this month – and this year – has been corporate earnings, not P/E expansion. With the economy running at full throttle corporate America has taken advantage of increased sales to fatten up the bottom line. Small and mid-caps have caught a bid the past few months as talk of legislation reducing corporate tax rates from 35% to 20% looks more likely to become law.
Global markets have also reacted positively in 2017 as global growth has been solid across the globe as indicated by JPMorgan’s Guide to the Markets. What is interesting to us is the strong performance by the international stock indices in 2017 has mirrored the US performance after years of lagging. The result is the MSCI EAFE is just now getting back to the levels it was at in 2008 (Chart #2) while the S&P 500 surpassed the pre-recession highs back in 2013.
So while we believe that the US market indices are on the high side of fairly valued, we find real value in overseas markets. In our opinion there are many technical reasons for US stocks to continue higher through the end of the year. Beyond that, however, for US markets to continue higher earnings need to continue to grow at a healthy pace.
After challenging the key 2.40% resistance level on the 10-year Treasury in October, November was a month of sideways price action as the bond traded in a relatively tight range. From our perspective no news is good news.
For quite some time we have been discussing the US Dollar in terms of being in a trading range of about 10 points between 90 and 100. This range dates back to early-2015, as one can see in Chart #4. That trading range is a part of the bigger picture which is great for seeing the long standing trends. At times, however, it is good to take a look under the hood, so to speak, at the shorter charts to get a different perspective on what the markets are trying to tell us.
The daily chart (Chart #5) presents a much different picture than the weekly chart (Chart #4). Here we see a downtrend that began in April 2017 which appears to have turned around in September. Heading into December we see strength in the US Dollar, but not a raging bull market. Instead, what we see is a possible change in trend, worth watching for sure, but no guarantee of success.
Over the second half of 2017 the commodities index has clawed its way higher, coming very close to being even for the year. The main reason for the uptick in the index is the strong performance by oil, up 11% for the year. With the index creeping up toward the top of the trading range we will be looking to see if the strength continues or is once again rebuffed at the resistance at the top of the 18+ month trading range.
As we do every December we will not be looking too far out as we plan on publishing our 2018 outlook in early January. We do, however, have an opinion on what we expect in the coming weeks. And that opinion is just what we said last month – heading into the final two months of the year we expect the current positive trend for the indices we follow to continue through the end of the year.
Unlike last month, however, we do see some subtle changes. In the stock market, for example, late-November saw some internal rotation from the technology sector into areas of the market that hadn’t previously done so well like retailers and telecoms. Some of this could be related to the current tax reform being negotiated in the US Congress, but not all in our opinion. What we see is areas of value starting to get some attention. If this is the start of a trend or a short-term anomaly has yet to be determined.
For bonds and commodities we do not expect major changes in December from what we have seen throughout 2017. The US Dollar, however, looks like it could be making a decision on direction relatively soon. Believe it or not the effects of the final tax reform bill (assuming it passes through Congress and is signed into law by the President) could help determine the ultimate direction of the dollar. If the lower tax rates stimulate the economy as projected by the bill’s supporters, it is likely the additional demand will result in increased imports, as the data shows has happened in the past. The wider trade deficit should result in a weaker US dollar.
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Robert I Cahill, Managing Partner Rob.Cahill@wfafinet.com
Jeffrey T. Bogert, Partner
Jonathan D. Soden, Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Associate Financial Advisor Jay.Knight@wfafinet.com