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Stocks at Record Levels

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PantagesThe stock markets continued on their roll with the Dow Jones hitting a new high of 17,574. The S&P 500 gained 0.6% this week to 2030, close its all-time high. It looks like when all is said and done, third quarter corporate earnings will come in around +9% y/y with three out of four companies beating expectations.

Meanwhile overseas, the Euro Stoxx index was off -1.5% for the week while the Japanese Nikkei soared +7.8% on BoJ easing. Both of these foreign stock market indices were up slightly less in dollars owing to the strengthening dollar in FX markets.

Ten year Treasury bond prices were up slightly last week. Their yields fell to 2.30%.

The monthly return data across asset classes are at the end of this post. Suffice it to say, after a poor start in October the equity markets came roaring back. Check out the REIT returns in October – up 8.9% in one month! Year to date, REITs are up a whopping 25.4% while the S&P 500 has gained 10.7%.

The FT reports: “Years of low interest rates and intense competition between lenders has helped push US commercial property prices to a new record – surpassing a previous peak reached at the height of the credit bubble in late 2007.”

Morgan Stanley estimates that “while commercial property prices have now completely recovered after falling 40% from their 2008 peak, US house prices have recovered only 55% of their value after dropping 35%.”

On Friday the labor department reported that the US unemployment rate fell to 5.8% last month and a lower than expected 209,000 new jobs were created. Wages were up 2% y/y. Consumer price inflation was up 1.7% y/y so we have some modest increase in “real wages”. It was an OK number, but not great.

The WSJ notes: “The broader economy contracted in the first quarter during an unusually harsh winter, and then rebounded strongly during the middle of the year. Improving consumer confidence and falling oil prices could support further expansion. But China’s slowing growth, Europe flirting with recession, and Middle East turmoil is raising concerns about the durability of U.S. economic gains”. (Maybe; it does look to us like a “tug of war” between better US growth amidst a deflationary global backdrop.)

Crude oil prices fell as much as $2 a barrel last week as Saudi Arabia lowered prices for U.S. buyers. Analysts believe OPEC would likely lower the ceiling on its collective production if oil prices fall to $70 a barrel. WTI oil hit $78 its lowest price since the middle of 2012. It looks like retail gas prices in the lower 48 are headed below $2.80.

Japan’s Government Pension Investment Fund, which holds assets totaling $1.14 trillion, said it will more than double its allocation to equities and slash exposure to domestic bonds to 35% from 60%.

The European Commission lowered its growth forecasts for Europe, citing the tensions in Ukraine and the Middle East, along with a lack of investment. They expect inflation to remain below 2% until 2016 and are pegging Eurozone growth next year at an anemic 1.1%, down from their 1.7% forecast made in the spring.

The ECB left interest rates unchanged last week at an all-time low, but President Mario Draghi said the bank was willing to take more steps to stimulate growth. He said the decision was unanimous. The euro fell to a two year low.

In our post on Wednesday we noted that we were likely to get some clues about possible post-election bipartisanship from the President and Republican Party leaders’ press conferences. Some analysts were hopeful.

Right on cue, Wednesday afternoon, the President came out swinging vowing to effect immigration reform via an executive order in the lame duck session. Senator McConnell offered that that was like waving a red flag to a bull. Speaker Boehner said the President was playing with fire and said one of his first orders of business was to repeal Obamacare.

Well, it’s good to see everyone in the sandbox is finally playing nice together, isn’t it?

There is quite a storm brewing in the Pacific. I hope our friends out on the Aleutians batten down the hatches and stay safe.

Jeff Pantages
Chief Investment Officer

 

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