Weekly Market Highlights:
Domestic stock prices ended up gaining ground on the week. Stock prices advanced this week in the wake of the strong IPO of Twitter. The S&P 500 posted its largest loss in two months on Thursday as the government reported that GDP grew faster than expected in the third quarter, but rebounded on today’s stronger-than-expected jobs report. Twitter jumped 73 percent in its first day of trading.
Global markets were mixed for the week. World markets were modestly higher overall, with European markets gaining on the European Central Bank’s unexpected announcement that it would cut interest rates to a record low of 0.25%. Asian stocks were mostly lower on concerns that this week’s positive GDP report would result in the Federal Reserve (Fed) scaling back its quantitative easing program sooner than expected.
Treasury prices were lower this week. The yield on the benchmark 10-year U.S. Treasury climbed as today’s jobs report indicated the employment situation is on the mend.
Commodity indices were sharply lower on the week. All three major complexes – energy, metals and grains – declined on reports of increased supplies.
A Macro View:
In an indication that the employment situation seems to be improving, the Labor Department today reported that non-farm payrolls grew by 204,000 in October, and September’s gains were revised upward to 163,000. At the same time, the unemployment rate ticked upward slightly to 7.3% from 7.2% the prior month. The gains in October exceeded even economists’ most optimistic forecasts, as consensus estimates called for a gain of only 120,000 jobs in October. Today’s employment report follows yesterday’s better-than-expected third quarter estimate of GDP growth, which came in at 2.8%, providing further support that the economy may finally be showing long-awaited signs of acceleration.
Stock prices shrugged at the positive economic news, as most market indices were lower on the week. Investors seem to have interpreted the data as giving the Fed support to scale back its bond-purchase program (quantitative easing) sooner than anticipated, perhaps as early as next month. By tapering its bond purchases, the Fed would be ever-so-slightly reining in the aggressively accommodative monetary policy it has been following for much of the past five years. At some point the market needs to come to grips with the fact that the Fed will need to end its program, and perhaps the economy is at just such an inflection point where growth is self-sustaining.
Despite the market’s struggles to post gains on this week’s encouraging economic news, it is unlikely we have seen the top in stocks and that a material decline is imminent. Part of the reason is that even though stocks have posted strong gains so far this year (the S&P 500 and Nasdaq Composite are up more than 22% and 27%, respectively), the asset class still is attractive relative to bonds. Stock multiples have expanded, causing valuations to be stretched, but the positive outlook for the economy makes the environment more favorable for stocks than for bonds. We have already seen an uptick in real interest rates, and investor rotation from bonds to stocks is likely to accelerate. So, with economic growth projected to pick up next year, corporate profits should also be on the rise, which is a positive for stocks but a negative for bonds. In such an environment, despite the run-up in stocks this year, equities should be overweighted and bonds underweighted in a portfolio. Within the fixed income allocation, given that Treasury yields have declined 40 basis points or so from their peak, the outlook for the economy would warrant a shortening of duration and an underweight to Treasury securities.
October marked another month of strong inflows with global ETFs/ETPs. Combining the US$32.6 billion of net inflows with positive market performance during October global ETF/ETP assets reached a new record high of US$2.3 trillion, according to preliminary findings from ETFGI’s October 2013 Global ETF and ETP industry insights report.
Year to date (YTD) through end of October, global ETF/ETP assets have increased by 19% based on positive market performance and net inflows of US$202.2 billion, which is in line with the level of net inflows at this point in 2012. Equity ETFs/ETPs gathered the largest net inflows with US$193.9 billion which is significantly higher than the US$112.7 billion at this point in 2012, followed by fixed income ETFs/ETPs with inflows of US$21.4 billion which is less than half the US$56.2 billion gathered YTD in 2012. Commodity ETFs/ETPs experienced outflows US$33.0 billion which is a reversal of the US$20.1 billion net inflows at this point in 2012.
Equities have been the preferred area to invest new assets in 2013 with net inflows of US$193.9 billion. North American equity ETFs/ETPs have gathered the largest net inflows YTD with US$117.7 billion, followed by developed Asia Pacific equity with US$32.8 billion, and developed European equity with US$20.7 billion, while emerging market equity ETFs/ETPs experienced net outflows YTD with US$6.3 billion.
YTD, Vanguard ranks first based on net inflows of US$51.6 billion, iShares is 2nd with US$51.3 billion, WisdomTree is 3rd with US$12.8 billion, PowerShares is 4th with US$12.6 billion and SPDR is 5th with US$9.5 billion.
Johnson & Johnson’s (JNJ) agreement to pay $2.2 billion for off-label marketing of the anti-psychotic drug Risperdal brings to more than $11 billion the amount of penalties pharmaceutical makers have been assessed for getting doctors to prescribe drugs for purposes other than approved by the FDA.
Known, as off-label marketing, the practice has helped boost drug sales over the years but frustrated regulators and law enforcement officials.
J&J’s settlement is huge, but not the largest. Here’s a not-entirely-comprehensive list, onto which J&J would become No. 2.
1. Pfizer (PFE) – $2.3 billion, 2009
2. Abbott (ABT) – $1.5 billion, 2012,
3. Eli Lilly (LLY) – $1.415 billion, 2009
4. Merck Sharp & Dohme – $950 million, 2011
5. TAP Pharmaceuticals – $875 million, 2001
6. Serono, S.A. – $704 million, 2005
7. Purdue Pharma – $634 million, 2007
8. Allergan (AGN) – $600 million, 2010
9. AstraZeneca (AZN) – $520 million, 2010
10. Bristol-Myers Squibb (BMY) – $515 million, 2007
Highlights for the week ending November 1, 2013:
A Macro View – October Monthly Recap
Domestic equity markets posted strong gains in October, as investors were encouraged by the resolution of the debt ceiling discussions and budget crisis. In addition, third quarter earnings reports have come in better than expected, creating a “sweet spot” environment for equities. Analysts see very few risks on the horizon – which in itself could be considered a risk – as the Fed is likely to maintain a highly aggressive monetary policy, GDP growth is expected to accelerate into 2014, and the fiscal situation is marginally improving. Economic data during the month was mixed, with the employment situation remaining lackluster, but manufacturing and housing continuing to be relatively strong. For the month, the S&P 500 advanced +4.6%, and is now up +25.3% on a year-to-date basis. The Dow Jones Industrials posted a +2.9% gain (+21.0% YTD), and the tech-heavy Nasdaq Composite Index was up +4.0% (+31.3% YTD). The Russell 2000 Index of small cap stocks underperformed the Russell 1000 Index of large cap stocks, with gains of +2.5% and +4.4%, respectively. In terms of sector performance, telecom services were the strongest performers on a relative basis, gaining +8.5%, while financials pulled up the rear with a gain of +3.3%.
International equity markets generated gains in line with the U.S. markets in October, with the MSCI World ex-U.S. Index advancing +3.4% for the month. Emerging markets bucked a recent trend of underperforming developed markets, with the MSCI Emerging Markets Index gaining +4.9%, as compared to the +3.4% gain of the MSCI EAFE Index. Regionally, Eastern Europe, Asia and Latin America were the best performers, with the MSCI Eastern Europe Index advancing +4.9%, and the MSCI Asia Index and MSCI EM Latin America Index each gaining +4.8% for the month. Although Japan had flat performance for the month, it is among the best performing countries/regions on a year-to-date basis with a +24.5% gain.
Fixed-income markets enjoyed a second consecutive month of solid performance. The primary driver was a growing consensus among market participants that the Fed will refrain from tapering its quantitative easing program until sometime in 2014. Economic data continues to be not as strong as expected, and inflation remains below the Fed’s target expectations. In addition, the employment situation, one of the Fed’s key indicators, remains sluggish despite a slight decline in the unemployment rate. Against this backdrop, the benchmark 10-year U.S. Treasury yield ended the month at 2.54%, a decline of seven basis points from September 30th. Broad-based fixed-income indices advanced in October, with the Barclays U.S. Aggregate Bond Index gaining +0.8% for the month. Global fixed-income markets posted strong gains relative to U.S. bonds for the month, with the Barclays Global Aggregate ex-U.S. Index climbing +1.1%. High yield bonds advanced with other risk assets like stocks; the Barclays U.S. Corporate High Yield Index posted a gain of +2.5% for the month. Municipals also continued to recover from steep losses two months ago by posting a gain of +0.8% in October , which followed September’s +2.2% advance.
Investors’ embrace of risk is approaching levels not seen since the height of the dot-com bubble.
This year through Oct. 25, some $277 billion has flowed into stock mutual funds and exchange-traded funds – the most since the technology stock bubble 13 years ago, according to TrimTabs.
U.S. stock mutual funds and ETFs have taken in $123 billion of investor money, the first net inflow since before the 2008 financial crisis. Global stock mutual funds and ETFs have taken in $154 billion, the fifth year in a row of net inflow.
Equities have gained popularity again as the threat of rising interest rates chases investors away from the bond market, and as some Internet companies make headline-grabbing initial public offerings, including Facebook last year and the pending debut of Twitter.
Investors have pulled $31 billion out of bond mutual funds and ETFs this year, the first annual outflow since $7 billion in 2004 and the biggest outflow since 2000, according to TrimTabs.
Highlights for the week ending October 25, 2013:
|Market/Index||2012 Close||Prior Week||As of 10/25||Week Change||YTD Change|
|Fed. Funds||.25%||.25%||.25%||0 bps||0 bps|
|10-year Treasuries||1.78%||2.60%||2.53%||-7 bps||75 bps|
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
A Macro View
It was an eventful week in the financial markets, resulting from the agreement reached in Washington to end the debt standoff and government shutdown. The framework negotiated by Senators Harry Reid (D – NV) and Mitch McConnell (R – KY) provides for funding of federal agencies at current levels until January 15, and will allow for continued government borrowing through February 7. The deal also includes provision for a budget negotiating committee tasked with developing plans for long-term fiscal solutions.
While a debt crisis has once again been averted at the 11th hour, as has been its recent history Washington only “kicked the can” down the road, and we will be confronted with the need to again raise the debt ceiling and deal with fighting over sequestration in early 2014. In addition to renewed budget negotiations at that time, the markets will also be paying close attention to the transition to a new Federal Reserve chairperson (President Obama has nominated Janet Yellen to the post) as well as the implications of potential tapering of the Fed’s quantitative easing (QE) program. One potential positive for future debt ceiling negotiations is that brinksmanship may be less likely due to the significant drop in approval ratings over the past several weeks for both the House Republicans and President Obama.
The equity markets also were encouraged by third quarter earnings results. Some large well-known companies such as Google, General Electric and Morgan Stanley all reported earnings that exceeded analyst expectations. Google’s stock rallied sharply today, with the company’s share price now exceeding $1,000 per share. Of the 100 S&P 500 companies that have reported so far this quarter, the average earnings growth has been 4.4%, while sales grew an average of 2%. The materials sector has been the most robust, with four companies reporting an average growth rate of 32%. Earnings overall have exceeded analyst expectations by about 4%, while sales have been slightly below expectations.
Markets are also looking ahead to the release next Tuesday (Oct. 22) of the September employment report, which was due to be released on October 4 but was delayed due to the government shutdown. According to Bloomberg, the consensus expectation among economists is that 180,000 jobs were added in September, while the unemployment rate held steady at 7.3%. A slew of additional data that had been delayed is slated to be released next week as well.