S&P 500 closes strong November with gains on positive economic data

Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves. – Peter Lynch

The stock market resumed its uptrend in the holiday-shortened week, making it gains in five of the last six weeks, as economic data was mostly favorable and optimism remained high that “phase one” of a trade deal between the U.S. and China would be completed by year-end. November was the best month for the stock market since June as the S&P 500 rose 3.4% for the month. All three major stock averages closed at record highs on Wednesday but relinquished some of those gains on Friday when President Trump signed legislation that supported protesters in Hong Kong. Investors feared that China may retaliate against the U.S. for taking such action and use it as an excuse to delay or derail trade negotiations. Fortunately for the stock market, positive economic data last week outweighed this potentially negative trade development, enabling stocks to post modest gains for the week. Third quarter gross domestic product (GDP) was revised higher from 1.9% to 2.1% and the stronger growth prompted JP Morgan economists to forecast fourth quarter GDP growth of 2.1%, much higher than originally expected. Durable goods orders in October were also much better than anticipated even though much of the increase was attributed to defense-related goods. Core capital goods orders, a reliable measure of business investment, far exceeded expectations and U.S. consumer spending rose for the eighth month in a row, a sign that the consumer remains healthy. None of this stronger economic data affected inflation, though, as it remained under control. The personal consumption expenditures (PCE) index, the preferred measure of inflation for the Federal Reserve, slipped to an annual rate of only 1.6% in October, below the Fed’s target of 2%. This lack of inflation has allowed interest rates to hover near historic lows as the 10-year Treasury yield ended the week at 1.78%. Although it was a positive week for the stock market, trading volume was light, particularly on Friday when the markets closed early. For this reason, one shouldn’t read too much into the price action for the week.

Last Week

The Beige Book, which is the Federal Reserve’s summary of economic conditions across the country, showed that the economy expanded modestly between October and mid-November while the economic outlook remained positive for next year as well. Consumer confidence dipped slightly in November but confidence levels are still high and should support solid consumer spending during the holiday season. New home sales also fell slightly in October but the overall housing market is still strong and supported by low mortgage rates.

Charles Schwab confirmed that it will be buying rival TD Ameritrade for $26 billion in an all-stock deal while LVMH reached a deal to acquire jeweler Tiffany for $16.2 billion in cash.

For the week, the Dow Jones Industrial Average rose 0.6% to close at 28,051 while the S&P 500 Index gained 1.0% to close at 3,140. The Nasdaq Composite Index jumped 1.7% to close at 8,666.

This Week

The most important piece of economic data this week will be the November employment report, which is expected to show that about 182,000 new jobs were created and that the unemployment rate remains at 3.6%. The November ISM Manufacturing Purchasing Manager’s Index (PMI) is forecast to be higher than the October reading but still below 50, which indicates that the manufacturing sector continues to contract. It would be the fourth consecutive reading below 50 for the index if the estimate proves accurate. The ISM Non-Manufacturing or services sector Purchasing Manager’s Index (PMI) for November should be on a par with the October reading and solidly in expansion territory. Both October construction spending and factory orders are expected to increase modestly.

The most prominent companies scheduled to report earnings this week include Bank of Montreal, Land’s End, Tiffany, Ulta Beauty, Dollar General, Campbell Soup, Kroger, H&R Block and AutoZone.

Portfolio Strategy

After posting a strong November, the calendar turns to the month of December, which has been the best month of the year for the stock market with an average gain of 1.6%. Last December was a disastrous one for stocks as the market plunged on Federal Reserve interest rate hike fears and the S&P 500 finished the year with a loss of about 4%. The biggest risk to the market now is the outcome of the trade talks between the U.S. and China. An additional 15% tariff on about $156 billion of Chinese products is scheduled to go into effect on December 15^th. China has also said that it wants rollbacks on any existing tariffs before it will agree to phase one of the trade deal. Stocks have been strong partly due to increasing optimism that this trade deal will be completed by year-end and the market could be vulnerable if one is not reached. The November employment report will also be important since a strong labor market is essential for consumer confidence and spending.  ADP is forecasting a gain of about 140,000 private-sector jobs in November compared to 125,000 in October and economists expect the government to report about 182,000 new jobs compared to only 128,000 in October. The jobs report in October did not include 46,000 General Motors workers who were on strike but they will be counted in the November employment report. Since consumer spending accounts for about two-thirds of economic activity, a strong headline payroll number should benefit holiday sales and translate into more robust economic growth in the fourth quarter.