Market Digest – Week Ending 11/6
October’s momentum in stocks carried over into the start of the month. The S&P 500 gained almost 1% for the week. Once again, international stocks failed to participate, falling modestly in dollar terms primarily as a result of currency. A stronger than expected jobs report released Friday makes it highly probable that the Fed will raise interest rates in December. Headline unemployment fell to 5.0%, the lowest since April of 2008. Treasury yields rose.
S&P 500: 2,099 (+1.0%)
FTSE All-World ex-US: (-0.2%)
US 10 Year Treasury Yield: 2.33% (+0.16%)
Gold: $1,088 (-4.6%)
USD/EUR: $1.074 (-2.4%)
• Monday – Volkswagen’s emissions scandal spread to subsidiary Porsche after US regulators said some cars were also found with the cheating software.
• Tuesday – US automaker light vehicle sales rose 13.6% in October from a year ago, exceeding estimates.
• Tuesday – Candy Crush maker King Digital was bought by Activision Blizzard for $6 billion, or roughly the same value when it IPO’d last year.
• Tuesday – Apple released quarterly results, exceeding expectations for revenues and earnings. Shares rose modestly.
• Wednesday – Fed Chairwoman Yelled testified to congress that the US economy is performing well and hinted that rates may be increased at the December meeting.
• Wednesday – Fed minutes explicitly said that there may be a rate increase in December.
• Thursday – The highly volatile Shanghai composite entered a technical bull market by rising 20% from a low in late August.
• Thursday – Facebook reported higher than expected earnings.
• Friday – US employers added jobs at a faster than expected rate, potentially creating a stronger case for an interest rate increase in December.
With the jobs report Friday, it seems much more likely than not that the Fed will begin to raise rates at its December meeting. The immediate reaction from the news was stocks fell, bonds fell, the dollar rose, emerging markets assets fell, gold fell and yield sensitive assets like utilities and REITs fell.
Each of these moves makes sense in a logical framework. Higher interest rates in the US should attract flows into dollar based assets. That is bad for other currencies, and particularly emerging markets which are somewhat reliant on capital flows in to support growth. Yield producing assets like utilities (and high dividend stocks in general) and REITs become less attractive if similar yield can be found in less volatile bonds. Banks rose because higher interest rates make it easier to capture more spread from the low yields paid to depositors and the higher yields on new loans.
But it is important to remember that what is logical is often already priced into capital markets and the “obvious” path forward is rarely followed. If rates rise in December, and we fully expect they will, it is equally likely that these trends accelerate, stop or even reverse. Everyone knows rates will rise at some point. That is much of why the dollar has already been so strong. What matters is how relative economies fare over the next few years. No one knows that, and a 0.25% or even 1% rise in interest rates doesn’t add much clarity. US based assets are more richly priced than international assets by most standard metrics. And the dollar is now expensive on a purchasing power parity basis.
The next one, six or twelve months are impossible to predict, but if we had to bet on the next five years we would choose international assets over the US. Having said all that, it is great to see the US economy gaining traction with a strong labor market, and growth finally starting to show up in real wages.