What I’m Watching This Week – 19 October 2015

The Markets (as of market close October 16, 2015)

Record corporate mergers and acquisitions headlined the economic news last week, while the market posted its third consecutive week of gains (except for the Russell 2000). Of the indexes listed here, both the large-cap Dow and S&P 500 closed the week with moderate gains, while the Nasdaq proved to be last week’s biggest winner. Money continued to find its way into the bond market, driving prices higher while pushing yields down.

The price of gold (COMEX) increased, selling at $1,177.30 by late Friday afternoon compared to $1,155.60 a week earlier. Crude oil (WTI) prices fell back a bit, selling at $47.26 per barrel by week’s end. For the first time in eight weeks, the national average retail regular gasoline price increased to $2.337 per gallon on October 12, 2015, $0.019 higher than the previous week’s price of $2.318 per gallon, but still $0.870 below a year ago.

Market/Index 2014 Close Prior Week As of 10/16 Weekly Change YTD Change
DJIA 17823.07 17084.49 17215.97 0.77% -3.41%
Nasdaq 4736.05 4830.47 4886.69 1.16% 3.18%
S&P 500 2058.90 2014.89 2033.11 0.90% -1.25%
Russell 2000 1204.70 1165.36 1162.31 -0.26% -3.52%
Global Dow 2501.66 2414.33 2421.58 0.30% -3.20%
Fed. Funds 0.25% 0.25% 0.25% 0% 0%
10-year Treasuries 2.17% 2.08% 2.03% -5 bps -14 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.

Last Week’s Headlines

  • Closing out the government’s fiscal year, the U.S. Treasury Department’s budget report for September showed the budget deficit narrowed by 9.2% to $438.9 billion. The deficit at the close of fiscal 2014 was $483.4 billion. Compared to fiscal 2014, total receipts for fiscal 2015 increased to $3.249 trillion ($3.020 trillion in 2014), while government outlays for 2015 were ahead of 2014–$3.688 trillion to $3.504 trillion. Tax increases, both individual and corporate, contributed to the higher income total for 2015, while higher expenditures for Social Security and Medicare added to 2015’s increased outlays.
  • The Federal Reserve produces a monthly index of industrial production that attempts to show how much factories, mines, and utilities are producing. Industrial production decreased 0.2% in September from August. In September, manufacturing output moved down 0.1% for a second consecutive monthly decrease; the index for mining fell 2.0%, while the index for utilities rose 1.3%. Capacity utilization (an estimate of how much factory capacity is in use) for the industrial sector fell 0.3% in September to 77.5% compared to August, a rate that is 2.6% below its long-run (1972-2014) average.
  • The Producer Price Index, which measures prices companies receive for goods and services, fell 0.5% in September, according to the U.S. Labor Department. For the 12-month period ended September 2015, producer prices fell 1.1%. Prices for goods dropped 1.2% (the largest decrease since January), while prices for services decreased 0.4% (the largest decline since February). In September, over 80% of the decline in the prices of goods can be traced to prices for energy, which fell 5.9%. These figures are yet another sign of stagnant inflationary trends.
  • Further adding credence to the fact that the rate of inflation is not increasing, the Bureau of Labor Statistics reported that the Consumer Price Index for September decreased 0.2%. Over the last 12 months, the index has essentially remained unchanged. The drop in gasoline prices helped fuel the fall in the index. In addition, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) decreased 0.6% over the last 12 months, meaning Social Security recipients will not see a cost-of-living adjustment next year–the first time that’s happened since 2011. Also, with Medicare Part B premiums scheduled to increase, about 30% of the roughly 52 million enrolled in Medicare Part B could see their premiums increase by as much as 52%, according to the Wall Street Journal.
  • Despite uncertainty in foreign economies, weakening job growth, and volatility in the stock markets, consumers continued to spend in September as retail and food services sales increased 0.1% from the previous month, and 2.4% above September 2014, according to the latest Census Bureau report. However, excluding motor vehicles, retail and food sales were actually down 0.3% in September. Lower gas prices may be giving consumers a few more discretionary dollars to spend as overall retail sales haven’t fallen since this past January.
  • An indication of manufacturers’ production is reflected in the ratio between the dollar value of inventories and sales. Theoretically, rising inventories may mean manufacturers are anticipating growing demand in the coming months. But if sales don’t grow commensurate with increased inventories (i.e., actual sales don’t meet expectations), then production will likely slow. With this in mind, the latest report from the Census Bureau reveals that business inventories were unchanged in August, while sales fell 0.6%, driving the inventory-to-sales ratio up to 1.37 in August from 1.36 in July. Thus, manufacturers are whittling down inventories against a decline in sales.
  • According to the latest report on job openings and labor turnover from the Bureau of Labor Statistics, the number of job openings decreased to 5.4 million on the last business day of August, while the number of hires and separations was little changed at 5.1 million and 4.8 million, respectively. Within separations, the quits rate and layoffs and discharges rate remained unchanged.
  • A preliminary survey of consumer sentiment for October shows that consumers did not prolong their concerns following September’s tumultuous stock market performance as the Index of Consumer Sentiment increased 5.6% to 92.1 from 87.2 in September. The University of Michigan’s Surveys of Consumers Current Economic Conditions index and its Index of Consumer Expectations also increased in the early part of October compared to September.
  • Initial claims for unemployment insurance decreased by 7,000 for the week ended October 10, to close at 255,000–its lowest level since 1973, matching the level recorded during the July 18 week. The advance seasonally adjusted insured unemployment rate was unchanged at 1.6% for the week ended October 3, while the advance number for continuing unemployment insurance claims decreased 50,000 to 2,158,000.

Eye on the Week Ahead

The housing market is in the news next week, with reports on both housing starts and existing home sales likely to reveal whether this sector continues its relatively strong showing this year.