Mixed economic data leaves S&P 500 flat

Cash combined with courage in a time of crisis is priceless. – Warren Buffett

In a holiday-shortened week characterized by light trading and an absence of any significant market-moving economic data, the S&P 500 Index closed basically flat and has risen less than 1% for the month of November. For the most part, the economic data that was released last week tended to be more positive than negative, which accounted for the modest gains in both the S&P 500 Index and the Nasdaq Composite Index. The gains might have been larger had a geopolitical event not temporarily unnerved investors. With investors’ nerves already frayed in the aftermath of the terrorist attacks in Paris, news that Turkey had shot down a Russian warplane near the Syrian border caused stocks to tumble on Tuesday. The stock market recovered and stabilized, though, on the release of the revised third quarter gross domestic product (GDP) report, which was raised to 2.1% from the initial reading of 1.5%. Durable goods orders for October also increased a stronger than expected 3% while core capital goods orders, a key measure of business investment, posted a healthy gain and reversed several months of weak readings. Both of these reports provided additional evidence for the Federal Open Market Committee (FOMC) to raise the federal funds rate when it meets on December 15^th and 16^th. With the third quarter earnings season mostly in the rear view mirror and sparse economic data between now and mid-December, there will be little news with which to affect share prices. But investors should be relieved that recent economic data points to an economy that should be strong enough to withstand a modest interest rate hike by the Federal Reserve.

Last Week

Other positive economic data last week included October new home sales, which rose almost 11%, and the S&P/Case Shiller composite index of home prices, which increased over 5%. A strong labor market and low mortgage rates have largely been responsible for a moderate and sustained recovery in the housing market. Steady job gains and rising wages also lifted the University of Michigan consumer sentiment index in November. On the negative side, a preliminary U.S. manufacturing index fell slightly, indicating a still expanding but slowing sector, and existing home sales in October fell more than expected.

For the week, the Dow Jones Industrial Average fell 0.14% to close at 17,798 while the S&P 500 Index added 0.52% to close at 2,090. The Nasdaq Composite Index gained 0.44% to close at 5,127.

This Week

The most anticipated economic report due out this week will be the November employment report, which is expected to show an increase of 200,000 new jobs and an unemployment rate that remains at 5.0%. The ISM manufacturing index for November should remain slightly above 50, indicating continued expansion, and October factory orders are expected to bounce back after a weak report last month. November automobile sales are expected to post a modest decline but are still on pace for 18 million in annual sales.

Federal Reserve Chair Janet Yellen addresses the Joint Economic Committee of Congress on the U.S. economic outlook, the European Central Bank (ECB) meets to consider additional stimulus measures and OPEC meets to discuss possible changes in its oil policy.

With the third quarter earnings season largely behind us, the most notable companies scheduled to report this week include Barnes & Noble, Medtronic, Kroger, Dollar General and American Eagle Outfitters.

Portfolio Strategy

The November employment report due to be released on Friday will be the last major piece of economic data between now and the FOMC meeting in mid-December. While it may seem like it’s a foregone conclusion that the Fed will hike interest rates, it’s by no means a slam-dunk. If the November jobs report meets or exceeds expectations of 200,000 new jobs, the Fed is likely to begin liftoff. If the payroll numbers are much worse than that, there is a good possibility that they could delay a rate hike. With real GDP growth in the U.S. at 2% and only 1.5% in Europe, this slight difference does not explain the fact that the ECB is in the early stages of quantitative easing and aggressive stimulus measures while the Federal Reserve is looking to normalize its monetary policy and begin the tightening process. Furthermore, in the face of an already strong dollar, an interest rate increase now would further weaken commodity prices and could hurt U.S. exports and corporate earnings. Weak economies overseas, especially in China, have contributed to weak commodity prices and a Federal Reserve interest rate increase would only compound the problem. A strong dollar and low oil prices have hurt 12-month trailing S&P 500 earnings and analysts have lowered earnings estimates for next year due to the effects of a strong dollar. While the Fed’s first interest rate hike in nearly a decade seems almost certain next month, there are still a number of reasons why it might be prudent to wait.