Week of December 5, 2016
Of the three major U.S. indices, only the Dow Jones Industrial Average eked out a positive return last week. The S&P 500 and the tech-heavy NASDAQ Composite were down 0.97% and 2.65%, respectively, while the aforementioned Dow Jones was up just 0.10%. International markets didn't fare much better. Japan's Nikkei 225 Average was down 0.47% for the week and the MSCI Europe index was off 0.33%.
For this week's commentary, we pick apart the changes in fund flows and consumer spending before reviewing November's unemployment report. We conclude with a fun story on one very expensive pair of Nikes.
Shifting Fund Flow
Since the presidential election, the U.S. stock market has surged to fresh all-time highs while the bond market has suffered from the exact opposite. We have noted before that data indicates the rise in equities is being driven largely by the retail investor but we felt it prudent to dig a bit further into the numbers and see where investors are moving their assets. Interestingly, investors poured more than $30 billion into domestic equity funds while pulling out more than $11 billion from bond funds for the two weeks ending November 22. For context, mutual fund and exchange traded funds (ETFs) witnessed a net outflow of $234 billion from January 2015 through November 9 of this year. Looking at the chart below, ETFs were the clear winners in terms of positive asset inflows while mutual funds experienced consistent outflows. Indeed, mutual funds withstood a whopping $57 billion for the past five weeks, with roughly $50 billion moving into ETFs. While investor sentiment is at the highest levels in the recent years, we don't believe the current flows represent large scale repositioning of portfolios according to the data from the Investment Company Institute (ICI).
Source: Data from Investment Company Institute, modified by Cresco Research
Consumer Spending Robust
Consumer spending accounts for about 70% of U.S. economic activity and is one of the primary drivers of GDP growth. According to the data, U.S. consumer spending increased 0.3% in October but came in lower than economists’ expectations of 0.4%. On the positive side, the U.S. Commerce Department reported that incomes increased 0.6%, the most since April. With incomes rising faster than spending, the saving rate jumped to 6% in October, up from 5.7% in September. The personal consumption expenditures (PCE) price index rose 0.2% and the core PCE, which excludes more volatile food and energy prices, increased 0.1% in October, in line with analyst expectations. The PCE index is up 1.4% on a 12-month basis and at the highest since October 2014. The Federal Reserve uses a mix of the core PCE and unemployment data when making their decision to change interest rates. However, a rate increase by year end is all but confirmed with the markets placing the probability of such an event at 100%.
Last Friday's market headlines swirled around the most recent jobs report, highlighting the estimated 178,000 new payrolls and a 4.6% unemployment rate from October's 4.9%. Economists were expecting a number in line with 180,000 and the unemployment rate to remain at the previous month's 4.9% reading, however, more people dropped out of the workforce last month resulting in the 0.3% decrease. Indeed, 400,000 decided to stop looking for jobs but economists note this is attributed to the aging labor force rather than younger workers growing frustrated. A broader measure of unemployment which also accounts for those that are underemployed, or workers that have stopped looking or are in part-time jobs and are willing to work full-time, fell from 9.5% in October to 9.3% in November and is the lowest since April 2008.
Fun Story of the Week
What's the most you have spent on shoes? Dress shoes can be quite expensive for a quality pair with many designer brands charging in the hundreds, if not thousands of dollars. But what's the most you've spent on a pair of sneakers and, more specifically, a pair of Nikes? Well, if you have $720 burning a hole in your pocket and tired of tying your shoes, the self-lacing Nike HyperAdapt sneakers may be a perfect fit. Inspired by the late 80's movie, Back to the Future II, the HyperAdapt shoes are adorned in black and white with a glowing blue accent on the sole under the arch. Given the fact that it takes five to ten seconds to tie one's shoes, the premium might not be worth it to many consumers except for the diehard Nike fans or those that want to live their inner Marty McFly.
Securities offered through Jacques Financial, LLC (JFLLC) a Broker-Dealer, Member FINRA and SIPC.Certain associates of Joseph W. Jacques, CPA, CFPTM are registered representatives of JFLLC. Joseph W. Jacques, CPA, CFPTM and JFLLC are affiliated. Investment advisory services are offered through Jacques Advisors, LLC an affiliate of JFLLC. Tax services are offered through Jacques & Associates Certified Public Accountants, LLC an affiliate of JFLLC.
This newsletter was written and prepared by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
NIKKEI 225 AVERAGE INDEX
The Nikkei 225 Average Index is a Japanese index that tracks the top 225 companies listed on the Tokyo Stock Exchange. It includes the most liquid Japanese stocks listed in the first section of the Tokyo Stock Exchange. It is price-weighted and yen-denominated.
MSCI EUROPE INDEX
The MSCI Europe Index captures large- and mid-cap companies across 15 developed markets countries in Europe.
Investment Company Institute, November 2016. https://www.ici.org/research/stats/flows/ltflows/flows_11_30_16
Seeking Alpha, November 2016. http://seekingalpha.com/article/4026167-hustle-flow
CNBC, November 2016. https://www.cnbc.com/2016/11/30/us-consumer-spending-income-increase-in-october.html
Post Bulliten, December 2016. http://www.postbulletin.com/business/consumer-spending-incomes-rise/article_0aaab2b2-1efc-5048-8975-3a694ded0439.html
Wall Street Journal, December 2016. http://www.wsj.com/articles/nike-trots-out-exclusives-to-sell-more-direct-1480597202
Wall Street Journal, December 2016. http://www.wsj.com/articles/u-s-nonfarm-payrolls-rose-178-000-in-november-unemployment-rate-4-6-1480685541