Follow the money
The headline on my FactSet workstation that is our primary tool for monitoring the stock market says: “Fear of missing out drives record inflows.” Global equity funds have attracted a record $33 billion in the last week as investors are becoming increasingly worried about missing out on the stock market. Year to date inflows to equities are over $77 billion, or five times faster than this time last year. We have looked at data from exchange traded funds (ETFs) and found that for 2018, the S&P 500 SPDR (SPY) has seen fund inflows of $7.8 billion followed by the iShares Core MSCI Emerging Markets ETF (IEMG) with $2.7 billion in new money. Rounding out the top ten are: iShares Core EAFE ETF(IEFA), the Industrial Sector SPDR (XLI), iShares MSCI Emerging Markets (EEM), iShares MSCI Japan (EWJ), the Vanguard S&P 500 ETF (VOO), the Dow Jones Industrial Average SPDR (DIA), Energy Select SPDR (XLE) and finally the Vanguard FTSE Developed Markets ETF (VEA).
At the bottom of the list, the largest ETF outflows year-to-date are coming from Consumer Staples (XLP), Financials (XLF), Healthcare (XLV) and Consumer Discretionary (XLY) sector ETFs, followed by REITS (VNQ), High Dividend (VYM) and Retail (XRT) ETFs.
Continuing the trend from 2017, stocks of the largest companies are generally outperforming small-cap and mid-cap stocks, and growth stocks are outperforming value. Additionally, both developed international and emerging market equities are outperforming U.S. stocks YTD. With regard to specific sectors, we remain overweight in Industrials, Technology and Financials relative to the S&P 500. We are market weight Healthcare, Energy, Consumer Staples, Consumer Discretionary and Materials (which we just brought up from an underweight position). We are only underweight two segments of the S&P 500 and they are Utilities and Real Estate.
We are looking for the right catalyst to increase our weight in small-cap stocks, but the tax reform bill so far hasn’t done it. We have however shifted a portion of our managed equity strategies into large-cap value based on several factors. We believe stronger economic growth, increased spending on fixed assets, accelerating inflation and financial deregulation will benefit value companies. Additionally, the relative under-performance of value stocks versus growth stocks in 2017 suggests the trend is due for a reversal.
Two Final Economic Thoughts
The Conference Board Leading Economic Index (LEI) increased a very healthy 0.6% in December suggesting the outlook for the U.S. economy continues to brighten. Seven of the ten indicators that make up the LEI increased in December. The only detractor was Average Weekly Hours Worked in Manufacturing which declined to 41.9 hours from 42 hours.
This morning, the Bureau of Economic Analysis (BEA) released the first, or advanced, estimate of fourth quarter 2017 GDP. Real GDP, adjusted for inflation, rose at an annualized rate of 2.6% during the final quarter of the year. While consumer spending remains a primary driver of growth, it should be noted that real disposable income increased only 1.1% for the quarter. Additionally, personal savings fell to just 2.6%, the lowest saving rate since 2005. Let’s hope wages start to move in 2018 before consumers run out of money.
Jobless claims remain low
- A rash of estimates in the January 13 week clouds an unusually steep decline in initial jobless claims which fell 41,000 last week to 220,000 for the lowest showing in 45 years. The most recent report shows a slight increase of 17,000 to 233,000.
- But six states and two territories had to be estimated including California, where claims are up 12,000, and once again Puerto Rico where claims rose more than 2,000 to 4,267 in a reminder that Hurricane Maria's impact back in September is still disrupting the territory's labor department.
- The January 13 week is also the sample week for the monthly employment report and the plunge, on its face, would point to a sizable increase in payroll growth and a further drop in the unemployment rate. Yet the unusual number of estimates will likely have forecasters putting this report to the side.
- The 4-week average, down 6,250 to 244,500 which, in an offset to the week's headline plunge, is up 15,000 from the sample week of the December employment report. This is a negative indication for the coming report. Continuing claims are mixed, up a sizable 76,000 to 1.952 million in lagging data for the January 6 week but steady at 1.920 million for the 4-week average.
- The estimates aside, the drop in the latest claims does speak to strength in the labor market and is underscored once again by how low the unemployment rate is for insured workers, holding steady in the week at 1.4 percent.
- The Philly Fed's manufacturing index remains very strong though it did ease a bit in this month to 22.2 vs December's revised 27.9
- New orders continue to build but at a slowing rate, at 10.1 vs December's outsized 28.2.
- Unfilled orders were actually drawn down, at minus 1.8 vs December's plus 12.8. And optimism is easing back in the sample as the 6-month outlook fell more than 10 points to what is still a very strong 42.2
- But that's where the soft spots end as shipments accelerated more than 6 points to 30.3, the workweek rose more than 5 points to 16.7, and employment held very solid at 16.8 yet nevertheless down nearly 3 points from December
- Price data speak to strength with inputs at 32.9 and selling prices at 25.1 which for the latter is up more than 12 points in the month and is unusually strong.
- This report was the first to take off this time last year in what correctly signaled a healthy 2017 for the factory sector but far above the Federal Reserve's assessment which was underscored yesterday by weakness in the manufacturing component of the industrial production report and the sector's "modest" description in the Beige Book.
Consumer sentiment softening
- Consumer sentiment continues to edge back, to an index level of 94.4 for preliminary January in the softest showing in six months.
- Weakness in the report is in the current conditions component which is down more than 4-1/2 points to 109.2 for a 15-month low. This hints at weakness for not only consumer spending in January but also perhaps for the labor market and the January employment report.
- But there are positives as the expectations component is steady at a very healthy 84.4.
- Inflation expectations are moving in the right direction, however slowly. Year-ahead expectations are up 1 tenth to 2.8 percent from final December which matches December's preliminary reading as the best showing in nearly two years. Five-year inflation expectations are also up 1 tenth, to 2.5 percent.
- January's indications are not that positive from today's sentiment report which however has consistently shown over the last year less consumer enthusiasm than either the monthly consumer confidence report or the weekly consumer comfort index which are both near 17-year highs.
National Activity Index
- Mining and utility output helped drive the national activity index to 0.27 in December vs a revised 0.11 percent in November and October's revised 0.87 outsized gain in a month that reflected the reversal of hurricane effects. October's gain is inflating the 3-month average which is up slightly at 0.42.
- December's contribution from the production component jumped to 0.25 from November's minus 0.02 as mining and utilities, up a monthly 1.6 and 5.6 percent in the industrial production report, offset a soft 0.1 percent gain for manufacturing.
- The sales, orders & inventories component contributed 0.08 to December's headline gain, up from November's 0.04, and together with production offset weakness in employment, at plus 0.01 vs November's plus 0.12, and also personal consumption & housing, at minus 0.07 vs minus 0.03 with the report citing a step back in housing starts as the main factor for December's decline.
- Putting mining and utilities aside, this report is mixed given the weakness in manufacturing, employment and also the housing reading.
- Growth of manufacturing activity in the Fifth District slowed more than analysts expected in January, with the Richmond Fed Manufacturing Index declining 6 points from December to 14.
- The moderating growth seen in the fifteenth consecutive monthly expansion continued December's deceleration from November when the index reached the highest level since 1993, and reflected decreases in the metrics for shipments, down 9 to 15, and employment, down 10 points to 20. Index components that also posted declines included capacity utilization, down 3 points to 13, and average workweek, down 6 points to 2.
- Elements of continued strength are also indicated in the report, however, as new orders remained strong though unchanged at 16, while the backlog of orders rose by 9 points to 5. Vendor lead times rose 12 points to 18, and wages were up 2 points at 24.
- Satisfaction with inventory levels for finished goods was unchanged at 17 while that for raw materials inventories was down 10 points to 14. Companies reported continued moderate price growth in both prices paid and prices received, while the level of price growth expectations for prices received declined.
- Despite the moderation seen in current company conditions, manufacturing executives expressed continued optimism regarding stronger growth six months ahead, with expectations for shipments up 1 point to 45, volume of new orders down 8 points but still strong at 36, and backlog of orders up 3 points to 25.
FHFA House Price Index
- Home prices rose a solid 0.4 percent in November with the year-on-year at 6.5 percent, based on FHFA's house price index.
- This index held near the 7 percent rate through much of last year underscoring the strength of the housing market. The West North Central posted the strongest monthly gain in November at 0.9 percent followed by the South Atlantic at 0.8 percent. The East South Central at minus 1.1 percent and New England at minus 0.1 percent were the weakest.
- Year-on-year rates are led by the Mountain region at 8.9 percent followed by the Pacific region at 8.6 percent with the Mid-Atlantic at the bottom at plus 4.2 percent.
Market PMI Composite Flash
- Market’s January flash manufacturing PMI came in at 55.5, a 34-month high. Better than the prior month’s 55.1 and consensus for 55.0. Release pointed to production volumes and incoming new work rising at faster rates than seen at the end of 2017.
- However, flash services PMI for January registered 53.3, the slowest rise in output since April. Result was lower than consensus for 54.3 and December’s 53.7. However, release pointed to upturn in new work and greater willingness of consumers to spend.
- Strength in manufacturing leads what is nevertheless a moderate PMI composite which came in at 53.8 for the January flash and slightly under Econoday's consensus for 54.0.
- Softness for a second month is in services where the index, held back by weakness in output, improved by nearly a point but still fell short of expectations at 53.3.
- Manufacturing, where change is considered a leading indicator for the economy in general, beat expectations by a 1/2 point at 55.5 and the best result in nearly three years.
- Export sales are a highlight of the manufacturing results as is production, employment and overall orders. The report's sample is trying to build inventories while traction for selling prices is the strongest in more than four years, both tangible signs of strength.
- Details on the service sector belie the weakness in the headline with acceleration in new orders and employment continuing to expand. Selling prices here are also on the rise.
Existing-home sales fizzle in December as supply hits an 18-year low.
- The numbers: Existing-home sales were at a 5.57 million seasonally adjusted annual rate in December, the National Association of Realtors said Wednesday.
- What happened: Sales of previously-owned homes tumbled in December as an ongoing inventory crunch worsened.
- Existing-home sales were down 3.6% for the month, though they were up 1.1% compared to a year ago. NAR said November’s selling pace was revised down to 5.78 million.
- Sales for all of 2017 were just 1.1% higher than in the previous year, but that was still enough to make it the best year since 2006.
- The consensus forecast among economists surveyed by MarketWatch was for a 5.73 million annual rate.
- The big picture: The biggest force in the housing market is still lopsided supply and demand. Inventory in December dropped 11.4% for the month, and 10.3% for the year. It marked the 31st month in which supply was lower compared to a year ago. At the current pace of sales, it would take 3.2 months to sell all available inventory, the lowest since NAR began tracking in 1999.
- That pushed prices higher - again. The median sales price in December was $246,800, up 5.8% compared to a year ago.
- “The lack of supply over the past year has been eye-opening,” NAR Chief Economist Lawrence Yun said.
- First-time buyers made up 32% of all transactions in December, up fractionally from 29% in November.
- Sales tumbled 7.5% in the Northeast, 6.3% in the Midwest, and 1.7% in the South. The West saw just a 1.6% decline in December.
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