If past history was all there was to the game, the richest people would be librarians. – Warren Buffett
In a holiday-shortened week characterized by light trading volume and plunging oil prices, the Dow Jones Industrial Average and the S&P 500 Index eked out modest gains with the Dow closing at yet another record high. The biggest news of the week occurred on Thanksgiving Day as the Organization of Petroleum Exporting Countries (OPEC) held a meeting and agreed not to cut back on the production of oil. This decision caused the price of oil to plummet by over 10% on Friday, the lowest level for West Texas Intermediate crude in over five years. While excess supply is certainly part of the reason for the drop in oil prices, worries about weakening global economic growth also are weighing on investors’ minds. With Japan officially in recession with two consecutive quarters of negative GDP growth, Europe teetering on the brink of recession and China adopting stimulus measures to spur economic growth, it’s no wonder that oil prices have collapsed. Emerging market stocks were particularly weak on Friday as investors grew restless over the possibility of a global slowdown. In the U.S., economic news last week was generally positive. The big surprise was the announcement that third quarter GDP was revised higher from 3.5% to 3.9%, meaning that in the past two quarters GDP has grown by an average of 4.2%. This is the strongest six-month stretch since the middle of 2003 and confirms that the U.S. economy is steadily improving. Although low oil prices will definitely affect fourth quarter earnings reports of energy companies, the decline in the price of black gold should be viewed as a positive for consumers and U.S. stocks in general.
Jobless claims rose by 21,000 to 313,000, which was an eleven-week high and broke the string of ten consecutive weeks that saw them below 300,000. This report can be very volatile, though, and it could take weeks to confirm whether or not a new trend is emerging. Consumer confidence rose for the fourth straight month and is at the highest level since July 2007. Renewed optimism about the employment outlook and better personal finances helped in part by a strong stock market were reasons cited for the upbeat report. Durable goods orders rose 0.4% in October due mostly to orders for military aircraft. Orders for commercial products and business investment were weak.
Data on housing was mixed as pending home sales fell by 1.1% in October while new home sales rose by 0.7%, the fastest pace in five months.
For the week, the Dow Jones Industrial Average edged up 0.1% to close at 17,828, a new all-time high, while the S&P 500 Index added 0.2% to close at 2,067. The Nasdaq Composite Index gained 1.7% to close at 4,791.
The highlight of this week’s economic data will be the employment report on Friday. Expectations are for total nonfarm payrolls to increase by about 225,000 and for the unemployment rate to fall to 5.7%. The November ADP private payroll data and the weekly jobless claims data should also confirm a labor market that continues to improve. The November ISM manufacturing index and October factory orders and construction spending should all provide evidence that the economy continues to expand and is on solid footing.
The European Central Bank (ECB) governing council meets to discuss interest rates and monetary policy as there is a strong possibility that the ECB will implement full-blown quantitative easing measures in early 2015 in order to jumpstart slumping economies in the euro zone.
Retailers will be the center of attention this week as Dollar General, Barnes & Noble, Kroger, Sears Holdings, Abercrombie & Fitch and American Eagle Outfitters report their earnings.
Since the S&P 500 Index reached an intra-day low back on October 15th, this broad market index has risen over 13% and has set eleven new highs in the month of November. While the months of November and December have historically been strong ones for stocks, the traditional Santa Claus rally may have already come and gone as evidenced by this powerful rally. Strong quarterly earnings, low interest rates, positive economic data and prospects for additional stimulus measures in Europe, Japan and China have all contributed to the rebound in stock prices. The best performing equities during this surge have been dividend-paying stocks and so-called low volatility names or defensive stocks such as those found in the consumer non-durables and health care sectors. These stocks have been popular because they provided downside protection in the most recent correction; in other words, they lost less of their value than the S&P 500 Index. However, these stocks have now become more expensive than the benchmark and sport price earnings ratios that exceed that of the S&P 500 Index. The key is to focus on low-priced stocks that are undervalued relative to the market and have price earnings ratios that are less than that of the overall market. These so-called value stocks are less risky, provide downside protection and offer the potential for above-market returns.