An Economic Review You Won’t Want to Miss

Overseas developments put pressure on U.S. stocks last month, and the S&P 500 lost 0.23% for November. The month got off to a bright start, with the DJIA and NASDAQ reaching highs unseen since 2008 … but a new round of worries over debt in the European Union, an artillery attack on South Korea by North Korea and concerns about tightening in China changed the mood. Stateside, the midterm elections were a bonanza for Republicans. The Federal Reserve unveiled another round of monetary easing. Mortgage rates went up; home sales didn’t. The dollar and gold both had a good month.

DOMESTIC ECONOMIC HEALTH

A political development and a policy move livened the economic discussion even more last month. The Republicans won control of the House, and that comforted Wall Street. Perhaps less reform and regulation and a more business-friendly environment would follow. Capitol Hill was poised for a negotiation over EGTRRA, JGTRRA and estate taxes; the question was, could a lame-duck Congress make up its collective mind before the end of 2010? The Fed announced plans to purchase $600 billion worth of Treasuries over an eight-month period, plus their intentions to buy as much as $900 billion in debt by the end of September 2011.(source) Some thought it was a wise move to promote lending, inflation and the overall economy; others thought the announcement effectively invited a trade war and wondered if the Fed’s actions would lead to bubbles.

The economy seemingly needed more encouragement. The Commerce Department put 3Q 2010 GDP at +2.5% — not bad, but hardly what was needed to make a dent in the jobless situation. (Unemployment was at 9.6% in October, and in late November the Fed estimated it would stay well above 7% through 2012. It also forecast growth of 3.0-3.6% for the economy in 2011, down from prior projections.) However, the Commerce Department brought us word that personal spending was +0.4% for October. Additionally, personal wages were +0.5% for the month, and the personal savings rate even ticked up a tenth of a percent to 5.7%. In October, real disposable income was 2.5% above year-ago levels, the best 12-month gain registered since June 2008.(source)(source)(source)

Consumer prices (at least as gauged by the Consumer Price Index) had risen just 0.2% in October, and the core CPI didn’t go up at all – it was flat for the third consecutive month. Retail sales were not flat – the Census Bureau said they were up 7.3% in October compared to 12 months before, and the monthly gain was 1.2%. With regard to Black Friday, many of the numbers were quite good: year-over-year sales improved at Macy’s (+6.1%), Target (+5.1%) and Costco (+9.0%), all topping those companies’ expectations.(source)(source)

How was manufacturing doing in America? The sector expanded for the sixteenth straight month in November, according to the Institute for Supply Management’s newest report. The pace of production did slow down a bit in November while stockpiles and supplier deliveries increased. The Commerce Department noted a 3.3% drop in hard goods orders for October.(source)(source)

GLOBAL ECONOMIC HEALTH

Ireland. Portugal. Spain. Greece. These were the economic hot spots in Europe in November, and the European Union was saddled with trying to put out either embers or full-fledged fires. Ireland was the latest nation to adopt austerity measures and accept a bailout; the European Central Bank and the International Monetary Fund arranged to offer as much as 85 billion euros of help to recapitalize banks and aid its punctured bubble economy. Economists feared Spain was next. That nation was dealing with astonishingly high unemployment, a stock market swoon, and the collapse of its real estate market. The bad news was that Spain’s debt was at about 64% of its GDP; the good news, so to speak, was that the majority of it was domestically financed. There hadn’t been much growth in the Eurozone in the third quarter: Germany’s economy expanded just 0.7%, and the Eurozone as a whole grew just 0.4%.(source)(source)(source)

The People’s Bank of China twice set new capital ratio requirements for the nation’s lenders in November, following its first interest rate hike since 2007. This decision came after China’s consumer prices rose 4.4% in October. Speaking of an economy heating up, Japan’s GDP improved to an annualized 3.9% in the third quarter.(source)(source)

WORLD MARKETS

It was generally a poor month for stocks worldwide. Yet Japan’s Nikkei 225 rose 8.0% in November, buoyed by noteworthy economic growth. While the German DAX advanced 1.3%, losses were more common in Europe – France’s CAC 40 slid 5.8% last month, the FTSE 100 lost 2.6%, Ireland’s ISEQ descended 1.4% and Spain’s IBEX fell a dramatic 14.3%. Away from Europe, India’s Sensex lost 2.6% for November, Australia’s All Ordinaries fell 1.2%, Brazil’s Bovespa declined by 4.2% and the Shanghai Composite in Hong Kong lost 5.3%. However, the TSX Composite in Canada gained 2.2% for the month, and a couple of benchmarks in emerging markets did surprisingly well – Russia’s RTSI gained 2.8% and Mexico’s Bolsa gained 3.5%.(source)
Speaking of emerging markets, the MSCI Emerging Markets Index lost 2.70% in November in U.S. dollar terms. Its sibling, the World Index, fell 2.35%. Our own U.S. Dollar Index rose to 81.32 at the end of November, climbing 5.56% for the month.(source)(source)

COMMODITIES MARKETS

The key precious metals mostly advanced last month. Only platinum did not, declining 2.4%. Gold gained 2.1% on the COMEX, ending November at $1,385.00 per ounce and making its gain 26.5% YTD. Silver rose 14.9% last month and palladium gained 9.0%. As for energy futures, oil advanced 3.3% to close the month at $84.11 per barrel, ending November up 6.0% YTD. Natural gas futures rose 3.5% in November and gasoline futures gained 6.3%; heating oil futures gained 3.6%. In crops, sugar grabbed headlines with its first negative month since May, as those futures fell 5.4%.(source)(source)(source)(source)

REAL ESTATE

Hm. Perhaps the home buyer tax credit needs to be reinstated? In light of the home sales numbers from October, it might help. New home sales fell 8.1% for the month, and existing home sales slipped 2.2%. The existing home sales rate was 25.9% below October 2009 and the new home sales pace was 28.5% below that of a year ago (but that was when the initial deadline for first-time buyer tax breaks was approaching). Existing home prices were down 0.9% from a year prior, according to the National Association of Realtors; the Commerce Department said new home prices were down 8.2% from October 2009.(source)(source)
Was there any upside worth noting? Yes. That came in the category of pending home sales. October’s pending sales rose 10.4% – the largest one-month jump since the NAR began tracking that statistic in 2001.(source)

Mortgage rates went up. (At least for the short term.) Comparing Freddie Mac’s October 28 and December 2 Primary Mortgage Market Surveys, we see that average rates on 30-year FRMs went from 4.23% to 4.46%. How about 15-year FRMs? The movement was similar: 3.66% to 3.81%. Over the same period, the average interest rates on 5-year ARMs went from 3.41% to 3.49%; average interest rates on 1-year ARMs actually diminished a bit from 3.30% to 3.25%.(source)

LOOKING BACK

November was the first down month for the DJIA since August. Fortunately, the losses were relatively minor across all three major U.S. indices.

%Change Y-T-D 1-Mo CHG 1-YR CHG 10-Yr AVG
Dow Jones +5.54% -1.01% +6.39% +0.57%
NASDAQ +10.10% -0.37% +16.49% -0.38%
S&P 500 +5.87% -0.23% +7.75% -1.02%
Real Yield 11/30 Rate 1 Yr Ago 5 Yrs Ago 10 Yrs Ago
10 YR TIPS 0.74% 1.41% 2.12% 4.03%
Sources: online.wsj.com, bigcharts.com, ustreas.gov, bls.gov – 11/30/10 (source)(source)(source)
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.
These returns do not include dividends.

December tends to be a very bullish month on Wall Street. Citing data from The Stock Trader’s Almanac, CNBC.com notes that since 1990, the S%P 500 has gained an average of 1.79% in the last month of a year, and posted monthly gains in 16 of the past 20 Decembers.(source) Of course that is simply past performance, and no guarantee of future results. December has certainly gotten off to a great start as global markets have reacted to assurances from the ECB about controlling EU member debt, the big rebound in pending home sales, and retail sales numbers from Black Friday weekend. If Congress extends the Bush-era tax cuts and sets a reasonable estate tax for 2011 and beyond, the rally at the top of December could potentially gain fresh legs.

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