Download October 7, 2016

In the markets:
U.S. stocks fell modestly for the week as investors awaited the start of the 3rd quarter earnings season.
All major indexes finished in the red, with the typically more volatile smaller cap indexes declining the
most. The Dow Jones Industrial Average fell -68 points to 18,240, a loss of -0.37%. The NASDAQ
Composite fell -19 points to 5,292, also down -0.37%. The LargCap S&P 500 declined -0.67%, while the
S&P 400 MidCap index lost -1.18%, and the SmallCap Russell 2000 brought up the rear, ending the week
down -1.21%.
In international markets, Canada’s TSX reversed from recent gains, falling -1.08%. The United Kingdom’s
FTSE 100 had a strong week rallying +2.1%, while on the mainland of Europe France’s CAC 40 was
basically flat, up just +0.04%, and Germany’s DAX fell slightly, down -0.19%. In Asia, Japan’s Nikkei was
up a strong +2.49%, along with Hong Kong’s Hang Seng which rallied +2.38%, although China’s Shanghai
Composite Index pulled back by -0.96%. Developed international markets as a group, as measured by
the MSCI EAFE Index, ended down -0.93% while emerging markets as a group, as measured by the MSCI
Emerging Markets Index, rose +0.64%.
In commodities, precious metals had another difficult week, this time led by a -9.5% plunge in Silver and
a -4.95% drop in Gold. The industrial metal copper, viewed by many as a proxy for the economic health
of the global economy, also ended down -2.13%. On the positive side, crude oil rallied for a 3rd straight
week, rising +3.25% to $49.81 for a barrel of West Texas Intermediate crude oil.
In U.S. economic news, the economy added +156,000 new jobs last month, a gain “good enough” that
some analysts suggest will give the Federal Reserve the green light to raise interest rates. Job creation
in some industries such as energy and manufacturing has slowed since last year, but most segments of
the economy are adding workers. Professional services, high-tech employers, health care companies,
and restaurants led the hiring in September. Jim Baird, chief investment officer in Plante Moran
Financial Advisors said “the jobs market remains a relative bright spot in an environment that continues
to be characterized by moderate growth overall.” The unemployment rate rose slightly to 5%, the first
uptick since April, mostly due to the fact that an additional 444,000 people entered the labor force.
The number of people who applied for new unemployment benefits fell by 5000 to 249,000 last week,
the second lowest level since the end of the Great Recession. Economists had been expecting a reading
of 256,000. Initial jobless claims have been under 270,000 for 14 straight weeks, an achievement not
seen since the early 70s. The low level of layoffs helps explain how the unemployment rate was able to
fall below 5% this year for the first time since 2008. The less-volatile smoothed four week average of
initial claims dropped -2,500 to 253,500. Continuing jobless claims, those people already receiving
unemployment checks, declined -6,000 to 2.06 million in the week ended September 24 - the lowest
level since late summer of 2000.
Private-sector employers added 154,000 private sector jobs in September, lower than the 175,000
reported by payroll processor ADP. The increase was the smallest since April and missed expectations of
170,000. In the report, small private-sector businesses added 34,000 jobs, medium businesses added
56,000, and large businesses added 64,000. Most of those gains were in the service sector with 151,000
jobs added, while goods producers added 3,000, and manufacturers actually lost 6,000. Mark Zandi,
chief economist at Moody’s Analytics, said job growth should be expected to slow as the U.S. nears full
employment.
The Institute for Supply Management (ISM) services index accelerated last month to an 11 month high
of 57.1, beating expectations by 4 points. Growth in the services sector has now reached 80 straight
months. In the ISM report, business activity surged +8.5 points to 60.3, while the index for new orders
was up +8.6 points to 60. Employment in services was also strong, up +6.5 points to 57.2. Numbers
above 50 indicate expansion.
Breaking recent trends, manufacturers reported improved business conditions last month, according to
the Institute for Supply Management (ISM) manufacturing index. The index rose back into expansion to
51.5, after dipping into contraction (sub-50) territory in August. Forecasts had been for a reading of
50.6. The survey of executives reported that new orders rose, but the industry is still experiencing soft
demand in the United States and weak exports. Richard Moody, chief economist at Regions Financial
stated “All in all, we’d rather have the headline index above 50.0 than below it, but the bottom line is
that the manufacturing sector still faces challenging conditions.” On a positive note, the measure of
new orders jumped to 55.1 from 49.1 and a gauge of production increased +3.2 points to 52.8.
Research firm IHS Markit’s Purchasing Managers Index (PMI) manufacturing index report was
considerably less enthusiastic than the ISM report. The PMI report indicated that production declined in
September and that orders are the weakest of the year. Chris Williamson, chief business economist at
IHS Markit stated “Manufacturing growth slowed to a crawl in September, suggesting the economy is
stuck in a soft-patch amid widespread uncertainty in the lead-up to the presidential election.”
Auto sales in the United States began to slow in September with the largest automakers reporting
declines. General Motors reported sales slipped -0.6% and Ford’s sales fell -8.1% despite efforts to keep
dealer lots full and offers of sweetened incentives for buyers. But Toyota reported that its sales rose
+1.5%, along with Nissan that reported an overall +4.9% gain. Industrywide, U.S. light vehicle sales are
expected to have fallen -1% compared with the same time last year, according to JD Power. In addition,
retail sales, which strip out sales to fleet buyers are seeing by JD Power as falling -1.4%, the fifth decline
in the past seven months.
U.S. construction spending weakened, according to the Commerce Department, dropping -0.7% in
August. Year over year, the spending in August of $1.14 trillion was -0.3% lower than a year ago. The
decline was led by steep cuts in spending on public projects, down -8.8% from a year ago and the lowest
level since March 2014. Spending on private projects fell -0.3% in August. Within that category,
residential spending fell -0.2% and nonresidential spending dropped -1.1%.
In Canada, for the first time in two years the economy managed two consecutive monthly employment
gains, adding +67,200 jobs last month. Statistics Canada reported that the gain was driven by the
biggest increase in self-employment in seven years. “If you can’t find work, you create your own work,”
said Vincent Ferrao, at the Labour Division of Statistics Canada. “It makes sense, given fewer people
were working for companies and more people were working on their own.” Most of the job gains came
in Quebec, Alberta and New Brunswick, Statistics Canada said, while employment in other provinces was
basically steady — most notably in Ontario and British Columbia, which had previously been showing
labor gains. The unemployment rate remained unchanged at 7% as more Canadians reported they were
actively looking for work.
Across the Atlantic in the United Kingdom, the International Monetary Fund (IMF) stated that Britain will
be the fastest-growing G-7 economy this year. The IMF also accepted the fact that its prediction of a
post-Brexit financial crash was overly pessimistic. The Washington-based IMF said Britain would have a
“soft landing” in 2016, with growth of +1.8%. However, it is sticking with its prediction of sub-par
expansion in 2017, sticking to its view that the economy would eventually suffer from its break with the
EU.
On Europe’s mainland, French President Francois Hollande gave a speech demanding that the United
Kingdom pay a heavy price for deciding to leave the EU. The French President called the Brexit
referendum the biggest crisis in the EU’s history and said its future depended on a determination to be
tough during exit talks. President Hollande stated: “There must be a threat, there must be a risk, there
must be a price. Otherwise we will be in a negotiation that cannot end well.” The comments followed
similar tough talk from German Chancellor Angela Merkel, none of which seemed to deter UK Prime
Minister May.
In Germany, politicians have accused the US of waging economic war as concern continues to rise
among that country’s political and corporate leaders over the financial health of Deutsche Bank, its
largest financial institution. Some of Germany’s top corporate leaders have come to the support of the
bank, stressing its importance to the economy and confidence in the leadership of the bank’s CEO John
Cryan. Deutsche has been under intense pressure since the United States Department of Justice
requested the bank pay a $14 billion settlement to settle claims of its mis-selling of mortgage securities.
Shares fell to their lowest level since 1983 last week before a rebound following rumors that the
settlement was closer to being a much smaller $5.4 billion.
The IMF has lowered its global economic growth forecast for China by -0.1%, to -3.1% based on China’s
efforts to switch its economic engine away from investment and towards consumption and services.
According to its forecasts, the change would reduce China’s GDP growth down to 6.6% this year, and
6.2% for next year. Frederic Neumann, co-head of Asian Economic Research at HSBC stated, “We are a
little bit cautious because we think the restructuring in China has barely begun. We would expect the
Chinese economy to slow down next year, and that could put headwinds for emerging markets going
into 2017.”
In Japan, Prime Minister Shinzo Abe is working on a ¥1 trillion ($9.6 billion) economic cooperation deal
with Russia. The envisioned cooperation covers 41 items chiefly concerning infrastructure construction,
resource development and improvement in the quality of life in the Russian Far East and Siberia. Among
the items are improvement of three Far Eastern ports — Vladivostok, Zarubino, and Vostochny — as
well as a ¥600 billion ($5.8 billion) project to construct a petrochemical plant near Vladivostok.
Finally, as the U.S. economy continues to create jobs there still appears to be no shortage of people
looking for work. The U.S. economy has added over 11.5 million jobs since the bottom of the Great
Recession, but that growth has slowed over the past 6 months. The slowdown is leading some to
speculate that we are nearing full employment. One number in the monthly jobs report that doesn’t get
a lot of attention is the available labor supply—the number of people who aren’t working, but would like
to. Over the past year, this “available” work force has actually grown despite the creation of 2.4 million
jobs. It appears that as more jobs are created, even more people are being pulled off the sidelines
looking for work. Even as headlines abound that the U.S. has achieved “full employment”, there are
nonetheless more than 14 million people out there who’d like to start earning a paycheck, the most in
more than a year.
(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com,
ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics
Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC,
361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)