November 2016 Monthly Outlook
The first estimate of Q3 US GDP was 2.9% - the strongest quarterly US economic growth rate in the last 2 years. Employment held stable with the September jobs report showing that 156,000 new jobs were added. The continued employment growth and stronger economic growth caused long term interest rates to jump sharply in October as the 10 year government yield increased 22 basis points to 1.83% at month end.
The Conference Board Leading Economic Index® (LEI) for the US increased 0.2% in September to 124.4. “The U.S. LEI increased in September, reversing its August decline, which together with the pickup in the six-month growth rate suggests that the economy should continue expanding at a moderate pace through early 2017,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “Housing permits, unemployment insurance claims and the interest rate spread were the main components lifting the index in September. Overall, the strengths among the leading indicators are outweighing modest weaknesses in stock prices and the average workweek.
Indicators point to the US economy continuing its slow growth (~2% annually) and being in the late stages of a long business up-cycle without major excesses that brought down some prior economic upturns.
Stock and Bond Market Commentary:
The improved US economic data caused long term interest rates to rise 22 basis points in October resulting in declines in bonds and real estate. The US stock market (S&P500) decreased 1.73% in October, mostly due to uncertainty around the elections. The markets have put about an 85% probability of Clinton winning the election, but by month end that dropped to 70%. The markets prefer the certainty and reasonableness of Clinton to the uncertainty of Trump, so when Trump’s probability of winning increased the markets sold off more sharply at month end.
Q3 earnings season has hit full swing and thus far earnings have been mostly in line with expectations of flat earnings growth for the quarter. There have been weaker earnings from consumer companies, especially restaurants and retail, as it seems that consumers have lost confidence and pulled back on spending despite strong employment. Investors have continued to shun healthcare stocks due to negative statements by both political candidates about rising healthcare costs. Based on valuations, this sector has by far the best long term risk to reward ratio, but there could continue to be weakness in the sector until there is more certainty around the elections and the policies of the new administration.