What I’m Watching This Week – 30 January 2017

The Markets (as of market close January 27, 2017)

The Dow reached 20000 for the first time ever midweek, and each of the indexes listed here posted gains of at least 1.0% over the prior week. Both the S&P 500 and Nasdaq reached record highs as favorable earnings reports coupled with anticipated pro-business policies apparently spurred trading, although a relatively weak GDP report at week’s end may have led to some pullback. Long-term bond prices remained stable as the yield on 10-year Treasuries climbed 2 basis points to 2.48%.

The price of crude oil (WTI) increased last week, closing at $53.12 per barrel, up from the prior week’s closing price of $52.33 per barrel. The price of gold (COMEX) fell, closing at $1,193.50 by late Friday afternoon, down from the prior week’s price of $1,207.40. The national average retail regular gasoline price decreased to $2.326 per gallon on January 23, 2017, $0.032 less than the prior week’s price but $0.470 more than a year ago.

Market/Index 2016 Close Prior Week As of 1/27 Weekly Change YTD Change
DJIA 19762.60 19827.25 20093.78 1.34% 1.68%
Nasdaq 5383.12 5555.33 5660.78 1.90% 5.16%
S&P 500 2238.83 2271.31 2294.69 1.03% 2.50%
Russell 2000 1357.13 1351.85 1370.70 1.39% 1.00%
Global Dow 2528.21 2588.99 2620.18 1.20% 3.64%
Fed. Funds target rate 0.50%-0.75% 0.50%-0.75% 0.50%-0.75% 0 bps 0 bps
10-year Treasuries 2.44% 2.46% 2.48% 2 bps 4 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

  • The economy, as measured by the gross domestic product, slowed in the fourth quarter, expanding at a tepid 1.9% annual rate. This rate falls short of the third-quarter annual growth rate of 3.5%, which had been the strongest in two years. A positive in the report is the growth in personal consumption expenditures and private inventory investment. However, they were offset by a downturn in exports and an acceleration in imports, leading to a widening trade deficit. Overall, while economic growth has been consistent at around 2.0% since the recession of 2008, the average rate of expansion is the weakest since 1949.
  • Orders for manufactured durable goods fell during the latter part of 2016. New orders for manufactured durable goods in December decreased $1.0 billion, or 0.4%, to $227.0 billion following a 4.8% drop in November. However, excluding transportation equipment and defense, both of which drove the decrease, new orders actually jumped 1.7%. Shipments of manufactured durable goods in December, up three of the last four months, increased $3.3 billion, or 1.4%, to $238.0 billion. New orders for nondefense capital goods in December increased $2.4 billion, or 3.8%, to $66.6 billion. New orders for defense capital goods decreased $4.8 billion, or 33.4%, to $9.5 billion. For the year, orders for durable goods fell 0.3% in 2016 compared to the prior year.
  • Lack of inventory and rising mortgage interest rates cooled existing home sales in December. Sales of existing homes fell 2.8% for the month to a seasonally adjusted annual rate of 5.49 million, down from a revised 5.65 million in November. With last month’s slide, sales are only 0.7% higher than a year ago. Nevertheless, existing home sales finished 2016 at 5.45 million sales — the highest total since 2006. Total housing inventory for existing homes dropped 10.8% to 1.65 million in December, which is the lowest level since 1999. The median existing home price for December was $232,200, a drop from November’s median price of $234,900. Nevertheless, last month’s median price for existing homes sold is a 4.0% increase over December 2015, marking the 58th consecutive month of year-over-year gains.
  • Not only did existing home sales fall in December, but sales of new single-family homes also slid last month. At an annual rate of 536,000, sales were 10.4% below the revised November rate of 598,000 and 0.4% below the December 2015 estimate of 538,000. The median sales price of new houses sold in December was $322,500; the average sales price was $384,000. The seasonally adjusted estimate of new houses for sale at the end of December was 259,000. This represents a supply of 5.8 months at the current sales rate.
  • The trade deficit for goods (not including services) narrowed slightly in December, according to the Census Bureau’s advance report. The international trade in goods deficit was $65.0 billion in December, down $0.3 billion from $65.3 billion in November. Exports of goods for December were $125.5 billion, $3.7 billion more than November exports. Imports of goods for December were $190.5 billion, $3.4 billion more than November imports.
  • Consumers are more confident in the economic future, according to the University of Michigan’s Surveys of Consumers. The Index of Consumer Sentiment increased from 98.2 to 98.5 in January, while the Index of Consumer Expectations jumped from 89.5 in December to 90.3 in January. The only negative is in Current Economic Conditions, which fell 0.6 percentage point to 111.3.
  • In the week ended January 21, the advance figure for seasonally adjusted initial unemployment insurance claims was 259,000, an increase of 22,000 from the previous week’s revised level. The previous week’s level was revised upward by 3,000 from 234,000 to 237,000. The four-week moving average was 245,500, a decrease of 2,000 from the previous week’s revised average. This is the lowest level for this average since November 3, 1973, when it was 244,000. The advance seasonally adjusted insured unemployment rate remained at 1.5%. The advance number for seasonally adjusted insured unemployment during the week ended January 14 was 2,100,000, an increase of 41,000 from the prior week’s revised level.

Eye on the Week Ahead

This week is highlighted by the latest report on the employment situation for January. While the unemployment rate has remained low, wage and salary increases have moved at a slow rate.

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What I’m Watching This Week – 23 January 2017

The Markets (as of market close January 20, 2017)

For most of last week, the market was fairly lackluster. By the close of the market last Thursday, the Dow had fallen to 19,732. However, equities rallied on Inauguration Day, recouping most of the value lost earlier in the week. Nevertheless, the Nasdaq and the large-cap Dow and S&P 500 each ended the week in the red compared to the prior week, while the Russell 2000, which had made substantial gains through the end of 2016, dropped almost 1.50% by week’s end and is below its 2016 year-end value. The dollar fell following President Trump’s remarks that the dollar was too strong. Long-term government bond yields climbed as prices on 10-year Treasuries dropped.

The price of crude oil (WTI) fell again last week, closing at $52.33 per barrel, down from the prior week’s closing price of $52.52 per barrel. The price of gold (COMEX) increased, closing at $1,207.40 by late Friday afternoon, up from the prior week’s price of $1,197.30. The national average retail regular gasoline price decreased to $2.358 per gallon on January 16, 2017, $0.030 less than the prior week’s price but $0.444 more than a year ago.

Market/Index 2016 Close Prior Week As of 1/20 Weekly Change YTD Change
DJIA 19762.60 19885.73 19827.25 -0.29% 0.33%
Nasdaq 5383.12 5574.12 5555.33 -0.34% 3.20%
S&P 500 2238.83 2274.64 2271.31 -0.15% 1.45%
Russell 2000 1357.13 1372.05 1351.85 -1.47% -0.39%
Global Dow 2528.21 2598.07 2588.99 -0.35% 2.40%
Fed. Funds target rate 0.50%-0.75% 0.50%-0.75% 0.50%-0.75% 0 bps 0 bps
10-year Treasuries 2.44% 2.39% 2.46% 7 bps 2 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

  • Consumer prices are reaching the 2.0% annual inflation rate targeted by the Federal Reserve. In December, the Consumer Price Index increased 0.3% for the month and 2.1% since December 2015 — the largest 12-month gain since the period ended June 2014. The index less food and energy climbed 0.2% in December, the same increase as in November. The index less food and energy rose 2.2% for the 12 months ended December. Over the past 12 months, energy prices have risen 5.4%, led by increases in gasoline (9.1%) and fuel oil (12.7%).
  • New residential construction was a mixed bag for December. On the positive side, the rate of privately owned housing starts increased 11.3% over November and is 5.7% above the December 2015 rate. On the other hand, both building permits for new residential construction (0.2%) and housing completions (7.9%) decreased from the prior month. However, compared to December 2015, both building permits (0.7%) and housing completions (8.7%) are ahead of last year’s rate.
  • The Federal Reserve’s monthly index of industrial production covers manufacturing, mining, and electric and gas utilities. Industrial production rose 0.8% in December after falling 0.7% in November. For the fourth quarter as a whole, the index slipped 0.6% at an annual rate. In December, manufacturing output moved up 0.2% and mining output was unchanged. The index for utilities jumped 6.6% — the largest gain since December 1989 — largely because of a return to more normal temperatures following unseasonably warm weather in November. Total industrial production in December was 0.5% above its year-earlier level. Capacity utilization for the industrial sector increased 0.6 percentage point in December to 75.5%, a rate that is 4.5 percentage points below its long-run (1972-2015) average.
  • In the week ended January 14, the advance figure for seasonally adjusted initial unemployment insurance claims was 234,000, a decrease of 15,000 from the previous week’s revised level. The four-week moving average was 246,750, a decrease of 10,250 from the previous week’s revised average. This is the lowest level for this average since November 3, 1973, when it was 244,000. The advance seasonally adjusted insured unemployment rate remained at 1.5%. The advance number for seasonally adjusted insured unemployment during the week ended January 7 was 2,046,000, a decrease of 47,000 from the previous week’s revised level.

Eye on the Week Ahead

Several important economic reports are out this week, including the latest figures on existing and new home sales for December. The housing market has been a positive sector for much of 2016. Also on tap is the Census Bureau’s advance report on international trade for December. The strength of the dollar has impacted the demand for foreign goods (imports) while reducing sales to foreign markets (exports). The week ends with the second estimate of the fourth-quarter GDP. The first estimate in December showed the fourth-quarter GDP increase by 3.5% over the third quarter.

What I’m Watching This Week – 17 January 2017

The Markets (as of market close January 13, 2017)

The past few weeks have seen the markets experience some volatility following several weeks of post-election gains. The Dow fell for the second time in the past three weeks, while the S&P 500 stayed about the same. Both the Global Dow and Russell 2000 posted marginal gains last week, while the Nasdaq gained almost a point. It appears that investors are in a wait-and-see mode until the president-elect’s new policies gain some traction.

The price of crude oil (WTI) fell again last week, closing at $52.52 per barrel, down from the prior week’s closing price of $53.70 per barrel. The price of gold (COMEX) increased, closing at $1,197.30 by late Friday afternoon, up from the prior week’s price of $1,172.60. The national average retail regular gasoline price increased for the sixth week in a row to $2.388 per gallon on January 9, 2017, $0.011 more than the prior week’s price and $0.392 higher than a year ago.

Market/Index 2016 Close Prior Week As of 1/13 Weekly Change YTD Change
DJIA 19762.60 19963.80 19885.73 -0.39% 0.62%
Nasdaq 5383.12 5521.06 5574.12 0.96% 3.55%
S&P 500 2238.83 2276.98 2274.64 -0.10% 1.60%
Russell 2000 1357.13 1367.28 1372.05 0.35% 1.10%
Global Dow 2528.21 2577.90 2598.07 0.78% 2.76%
Fed. Funds target rate 0.50%-0.75% 0.50%-0.75% 0.50%-0.75% 0 bps 0 bps
10-year Treasuries 2.44% 2.42% 2.39% -3 bps -5 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

  • Retail and food services sales climbed 0.6% in December over November. However, much of the increase was tied to soaring automobile sales. Less auto sales, retail sales advanced only 0.2% during the busy holiday shopping season. Consumers really didn’t increase their spending in December, as sales, excluding autos and gas, were flat. Nevertheless, total sales were up 4.1% from December 2015. Nonstore (online) retail sales were up 13.2% from December 2015, while miscellaneous stores were up 7.1% from last year.
  • Producer prices continued edging higher in December, increasing 0.3% following November’s 0.4% advance. In December, nearly 80% of the increase was attributable to a 0.7% increase in goods, led by increasing energy prices. Services inched up only 0.1%. Prices less foods, energy, and trade services moved up 0.1% in December after rising 0.2% in November. In 2016, the index less foods, energy, and trade services climbed 1.7% following a 0.3% advance in 2015.
  • While a bit dated, the Job Openings and Labor Turnover report from the Bureau of Labor Statistics provides useful information on the number of job openings, hires, and quits. The latest edition for November 2016 shows the number of job openings was little changed at 5.5 million. Over the month, hires and separations were also little changed at 5.2 million and 5.0 million, respectively. The total separations rate was 3.5% for the month (3.4% in October). Within separations, the quits rate was unchanged at 2.1% and the layoffs and discharges rate was unchanged at 1.1%. The job openings rate was 3.7% in November (3.6% in October), while the hires rate was 3.6% (unchanged from the prior month).
  • According to the latest information from the Bureau of Labor Statistics, import prices resumed an upward trend in December, rising 0.4%, after a 0.2% decline the previous month. The advance in December was primarily driven by higher fuel prices, which advanced 7.3% — the largest monthly increase since the index rose 10.5% in June. Excluding fuel, the import price index fell 0.2% for December. Prices for overall imports advanced 1.8% between December 2015 and December 2016, the largest 12-month increase since the index rose 3.5% in March 2012. U.S. export prices increased in December, rising 0.3% following a 0.1% decrease in November. Prices for overall exports rose 1.1% for the year ended in December, the first 12-month increase since the index advanced 0.4% in August 2014 and the largest over-the-year rise since a 1.5% increase in February 2013.
  • The federal deficit shrunk in December compared to November. The December deficit was $27.5 billion compared to $136.6 billion the prior month. Government receipts were $319.2 billion, up from $199.8 billion in November, while expenditures were $346.7 billion — about $10 billion ahead of November’s receipts. These figures are comparable to December 2015, when the deficit was $14.4 billion. For fiscal 2017, which begins in October, the deficit is $208.4 billion compared to $215.5 billion for the first three months of fiscal 2016. Thus far for FY 2017, total receipts are $740.8 billion ($765.6 billion over the same three-month period in 2015), while total outlays are $949.1 billion ($981.2 billion last year).
  • Consumer confidence remained at roughly the same level in January as it was in December, according to the Surveys of Consumers from the University of Michigan. Consumers maintained the same level of confidence in the current economic conditions, although consumer expectations waned a bit in January from December.
  • In the week ended January 7, the advance figure for seasonally adjusted initial unemployment insurance claims was 247,000, an increase of 10,000 from the previous week’s revised level of 237,000. The advance seasonally adjusted insured unemployment rate remained at 1.5%. The advance number for seasonally adjusted insured unemployment during the week ended December 31 was 2,087,000, a decrease of 29,000 from the previous week’s revised level.

Eye on the Week Ahead

Corporate earnings reports could influence equities as investors look to whether companies finished the year strong. Consumer prices have climbed at an annual rate of 1.7% through November. The last report for 2016 on the CPI is out this week as prices push toward the Fed’s target inflation rate of 2.0%.

What I’m Watching This Week – 9 January 2016

The Markets (as of market close January 6, 2017)

The markets regained their swag as each of the indexes listed here posted week-over-week gains at the close of the first week of the new year. The Dow gained a little over 1.0% for the week, inching closer to 20000 for the first time ever. Nasdaq posted the largest gain of the week, followed by the Global Dow. The dollar strengthened, cutting into exports, while the yield on 10-year Treasuries stayed the course.

The price of crude oil (WTI) fell slightly last week, closing at $53.70 per barrel, down from the prior week’s closing price of $53.83 per barrel. The price of gold (COMEX) increased, closing at $1,172.60 by late Friday afternoon, up from the prior week’s price of $1,152.40. The national average retail regular gasoline price increased for the fifth week in a row to $2.377 per gallon on January 2, 2017, $0.068 more than last week’s price and $0.349 higher than a year ago.

Market/Index 2016 Close Prior Week As of 1/6 Weekly Change YTD Change
DJIA 19762.60 19762.60 19963.80 1.02% 1.02%
Nasdaq 5383.12 5383.12 5521.06 2.56% 2.56%
S&P 500 2238.83 2238.83 2276.98 1.70% 1.70%
Russell 2000 1357.13 1357.13 1367.28 0.75% 0.75%
Global Dow 2528.21 2528.21 2577.90 1.97% 1.97%
Fed. Funds target rate 0.50%-0.75% 0.50%-0.75% 0.50%-0.75% 0 bps 0 bps
10-year Treasuries 2.44% 2.44% 2.42% -2 bps -2 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

  • Job growth slowed in December but wages increased, according to the latest report from the Bureau of Labor Statistics. December saw 156,000 new jobs created while the unemployment rate edged up 0.1 percentage point to 4.7%. Job growth occurred in health care and social assistance. Job growth totaled 2.2 million in 2016, less than the increase of 2.7 million in 2015. The average workweek for all employees on private nonfarm payrolls was unchanged at 34.3 hours in December. Average hourly earnings for all employees on private nonfarm payrolls increased by $0.10 to $26.00 in December, after edging down by $0.02 in November. Over the year, average hourly earnings have risen by 2.9%. The gain in wages may be pointing toward inflationary risks cautioned by the Fed, supporting further interest rate hikes this year.
  • The trade deficit expanded in November, as exports fell 0.2% while imports increased 1.1%, primarily attributable to a sharp increase in oil imports. The goods and services deficit was $45.2 billion in November, up $2.9 billion from the revised $42.4 billion in October. November exports were $185.8 billion, $0.4 billion less than October exports. November imports were $231.1 billion, $2.4 billion more than October imports. Year-to-date, the goods and services deficit decreased $4.9 billion, or 1.1%, from the same period in 2015. Exports decreased $56.6 billion, or 2.7%. Imports decreased $61.4 billion, or 2.4%.
  • Purchasing managers reported that December was a good month in the manufacturing sector as the purchasing managers’ indexes from Markit Economics and the Institute for Supply Management each reported increases over their respective November readings. The Markit U.S. Manufacturing Purchasing Managers’ Index™ registered 54.3 in December, up slightly from 54.1 in November, to signal the strongest improvement in business conditions in just under two years. The ISM PMI® for December registered 54.7%, an increase of 1.5 percentage points from the November reading of 53.2%.
  • The non-manufacturing (service) sector remained strong in December according to the Institute for Supply Management® Non-Manufacturing Index, which registered 57.2%, the same as November and the highest reading for 2016. Within the ISM’s latest Report On Business, the New Orders Index registered 61.6%, 4.6 percentage points higher than the reading of 57% in November. The Non-Manufacturing Business Activity Index decreased to 61.4%, 0.3 percentage point lower than the November reading of 61.7%. The only real negative in the report is the Employment Index, which decreased 4.4 percentage points in December to 53.8% from the November reading of 58.2%. Nevertheless, any reading over 50% indicates growth in the respective sector.
  • Last month the Fed unanimously agreed to raise the benchmark federal-funds rate by a quarter percentage point, based on the assumptions that the labor market would continue to strengthen, economic activity would expand at a moderate pace, and inflation would continue to edge toward the Committee’s target rate of 2.0%. However, the minutes of the December meeting also reflect the uncertainty some members of the Committee relative to the impact the new president and Congress may have on the economy. Committee members generally expect some financial stimulus such as infrastructure spending, tax cuts, and improved trade deals from the new administration.
  • In the week ended December 31, the advance figure for seasonally adjusted initial unemployment insurance claims was 235,000, a decrease of 28,000 from the previous week’s revised level of 263,000. The advance seasonally adjusted insured unemployment rate remained at 1.5%. The advance number for seasonally adjusted insured unemployment during the week ended December 24 was 2,112,000, an increase of 16,000 from the previous week’s revised level.

Eye on the Week Ahead

The markets should be busy in the first full week of the new year. This week economic reports for December 2016 include the Producer Price Index and retail sales, which highlight year-end inflationary trends.

Annual Market Review – 2016

Overview

The year 2016 likely will be remembered for the election of Donald Trump as the 45th president of the United States and the Brexit vote. This year also saw the Fed raise interest rates for the first time since last December, noting that the labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since midyear. While inflation remains below the Fed’s target of 2.0%, the Committee expects inflation to rise to its target level over the medium term on the heels of anticipated improvements in energy and import prices and continued labor strengthening. Equities began the year hitting the skids as receding oil prices and a plummeting Chinese stock market pushed stock prices down and bond prices up. By midyear equities had recovered, despite Great Britain’s decision to exit the European Union. Following the results of the presidential election, stocks surged to new highs. Whether this trend continues in 2017 remains to be seen following President-elect Trump’s first few months in office.

Market/Index 2015 Close Prior Week 2016 Close Month Change Q4 Change 2016 Change
DJIA 17,425.03 19,933.81 19,762.60 3.34% 7.94% 13.42%
Nasdaq 5,007.41 5,462.69 5,383.12 1.12% 1.34% 7.50%
S&P 500 2,043.94 2,263.79 2,238.83 1.82% 3.25% 9.54%
Russell 2000 1,135.89 1,371.51 1,357.13 2.63% 8.43% 19.48%
Global Dow 2,336.45 2,536.42 2,528.21 3.02% 2.79% 8.21%
Fed. Funds target rate 0.25%-0.50% 0.50%-0.75% 0.50%-0.75% 25 bps 25 bps 25 bps
10-year Treasuries 2.26% 2.54% 2.44% 6 bps 85 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.

Snapshot 2016

The Markets

  • Equities: The year didn’t start off well for equities, but by the end of 2016 each of the indexes listed here posted year-over-year gains, some reaching all-time highs. The Dow recorded its best performance since 2013, gaining almost 13.5% from its 2015 closing value. Stocks weathered several financial crises, including China’s economic downturn and the Brexit vote. The large-cap S&P 500 proved less volatile during the year, yet closed 2016 up almost 11.0%. The Russell 2000 proved to be the year’s biggest gainer, soaring almost 20.0% over last year’s closing value. Most of the gains in equities happened during the second half of the year as favorable corporate earnings, resurgent oil prices, and accelerating consumer income and spending encouraged investors to trade. Without doubt, the presidential election proved to be a pivot point for the stock market as expectations of looser regulation, fiscal stimulus, and tax cuts fueled the market rally. The Dow (19974.62), S&P 500 (2271.72), Nasdaq (5487.44), and Russell 2000 (1388.07) each attained record-high closing values during the latter part of the year.
  • Bonds: Volatility best describes the long-term bond market for 2016. Yields on 10-year Treasuries rose for the second straight year as prices fell. The yield on the benchmark 10-year Treasury note closed at 2.44%, up from its 2.26% yield at the close of 2015. During the early part of the year, bond prices rose as yields sunk below 1.40%. However, as investors saw a strengthening economy, higher inflation, and rising interest rates, a period of bond sales occurred, which peaked during the last quarter when the Treasury yield gained almost 0.85 percentage point, marking the largest quarterly gain since 1994.
  • Oil: As oil producing countries flooded the market, oil prices fell below $30 per barrel during the first quarter. However, by the end of the year, crude oil prices had achieved their biggest annual gain since 2008. With OPEC pledging to cut production, oil prices surged to almost $60 per barrel, finally settling at $53.89 (WTI) per barrel on December 30.
  • Currencies: The dollar remained strong throughout the year, affecting imports and exports in the process. Falling oil prices, coupled with the expectation of higher interest rates, helped boost the U.S. dollar, which continued to rise over the course of the year. The U.S. Dollar Index, a measure of the dollar relative to the currencies of most U.S. major trading partners, gained about 3.67% over last year’s closing value. The dollar also benefitted from interest rates abroad, some of which were even lower than those for Treasuries. Tightening trade restrictions proposed by President-elect Trump may curtail continued growth of the dollar in 2017.
  • Gold:Gold rose over 8.5% on the year, closing 2016 at $1,152.00. Much of the gain was seen during the first half of the year, as the price fell following a lengthy period of sell offs. Gold prices dropped seven of the last eight weeks as the stock market surged.

The Economy

  • Employment: Improvement in the U.S. job market was slow but steady, with employment growth averaging 180,000 new jobs per month in 2016, compared with an average monthly increase of 229,000 new jobs in 2015. The unemployment rate ended the year (as of November 2016) at 4.6%, lower than the 5.0% rate at the close of 2015. According to the Bureau of Labor Statistics, there were 7.4 million unemployed persons in November 2016, down from 7.9 million unemployed in November 2015. The employment participation rate remained relatively the same — 62.7% in 2016 compared to 62.5% at the end of 2015. The employment to population ratio also remained relatively unchanged (59.7% in 2016 to 59.4% in 2015). In 2016, the average workweek was 34.4 hours. Average hourly earnings in 2016 increased $0.62 to $25.89 — a 2.5% gain over 2015.

  • GDP: The economy maintained a roughly 2.0% average growth rate through the third quarter of 2016. Economic growth has maintained this pace since 2009. The first-quarter GDP rose 0.8%, followed by a 1.4% gain in the second quarter and a 3.5% increase in the third quarter. Personal consumption expenditures, the value of consumer purchases for goods and services, increased an average of about 3.0% through the first three quarters of 2016. Gross domestic product measures the cost of production of U.S. goods and services. Gross domestic income, which is a measure of all income earned from the production of goods and services, rose 4.8% in the third quarter of 2016, compared to a 2.5% increase in the third quarter of 2015.
  • Inflation/consumer spending: Based on the growth of consumer income, spending, and inflation, the economy for 2016 may be described as stable at best. Inflation remained below the Fed’s stated target rate of 2.0%, but indications are that it is expanding, albeit at a deliberate pace. Personal income through November increased 3.5% compared to November 2015. After-tax income (disposable personal income) over the same 12-month period rose 3.7%. Consumer spending, as measured by personal consumption expenditures, climbed 4.2% from November 2015. The personal consumption price index, an inflationary gauge relied on by the Fed, rose 1.4% year-over-year, while core PCE (PCE less volatile food and energy prices) increased 1.6%. The prices consumers pay for goods and services saw a moderate 1.7% increase from last November.
  • Housing: The housing market had been relatively strong for much of the year. Through November, existing home sales are up 15.4% over a year ago. The November annual sales rate of 5.61 million is the highest since February 2007. The median existing-home price for all housing types in November was $234,900, up 6.8% from November 2015 ($220,000). November’s price increase marks the 57th consecutive month of year-over-year gains. Total housing inventory was 1.85 million existing homes for sale — 9.3% lower than last November. Coupled with a shortage of rental units, home prices and rents are outpacing income in much of the country, according to the National Association of Realtors®. New home sales jumped 16.5% above the November 2015 estimate of 508,000 annual rate of sales. The median sales price of new houses sold in November 2016 was $305,400 ($317,000 in 2015); the average sales price was $359,900 ($376,800 in 2015). The seasonally adjusted estimate of new houses for sale at the end of November was 250,000. This represents a supply of 5.1 months at the current sales rate compared to a 5.4-months supply a year ago.
  • Manufacturing: Manufacturing and industrial production were not consistently strong sectors this year. The Federal Reserve’s index of industrial production revealed that total industrial production in November was 0.6% lower than its year-earlier level. Overall industrial capacity utilization, a measure of efficiency, decreased 0.4 percentage point in November to 75.0%, a rate that is 5.0 percentage points below its long-run average. Capacity utilization for manufacturing was 74.8%, a rate that is 3.7 percentage points below its long-run average, which contributed to the decline in overall industrial capacity utilization. Evidencing stagnant manufacturing activity, new orders for manufactured durable goods (expected to last at least three years) declined 0.3% year-over-year, while shipments fell 0.8%. Capital goods — tangible assets used by manufacturers to produce consumer goods — also fell back as shipments decreased 4.5% and new orders dropped 3.2% from last year.
  • Imports and exports: For the year, the goods and services trade deficit decreased $8.8 billion, or 2.1%, from the same period in 2015. Exports decreased $58.7 billion, or 3.1%. Imports decreased $67.5 billion, or 2.9%. The strength of the dollar directly affected both import and export prices. Import prices fell 0.1% while export prices dropped 0.3% over the 12 months ended November 2016.
  • International markets: The big news on the international front was the United Kingdom’s referendum vote at the end of June to exit (“Brexit”) the European Union. After the vote was announced, Prime Minister David Cameron, an opponent of the push to leave the EU, resigned, with Theresa May becoming prime minister. Domestically, equities took an immediate hit following news of the vote, but recovered fairly quickly. The value of the pound remains near a 30-year low and Britain lost its AAA credit rating, increasing the cost of government borrowing. However, both the FTSE 100 and the FTSE 250 closed the year trading higher than before the referendum. Depending on negotiations, the UK is expected to leave the EU by the summer of 2019. In other parts of the world, China’s economic growth slowed during the year, but later stabilized following further government stimulus. Central banks in Japan and Europe continued lowering interest rates to negative values, intending to motivate more lending and investing.

Eye on the Year Ahead

As the year came to a close, the Fed raised interest rates based on some favorable economic news, particularly on the labor front and expanding economic activity. The Fed is expected to consider three more rate increases during 2017. New economic policies promoted by President-elect Donald Trump during his first year in office will likely impact the economy and equities markets, both domestically and abroad. Will stock prices, which rose dramatically in the weeks following the election, continue their bull run in 2017? Will oil prices reach $60 per barrel as OPEC attempts to curb production? Will the dollar remain strong, impacting import and export prices? Next year may ultimately prove to be as eventful as 2016.

What I’m Watching This Week – 2 January 2017

The Markets (as of market close December 30, 2016)

The Dow suffered its first weekly loss since the presidential election, and each of the indexes listed here closed the last week of 2016 on the down side. Despite the lackluster returns for the final week of the year, each of the indexes closed the year in positive territory, led by the Russell 2000, which posted almost a 20% year-over-year gain. Long-term bond prices and gold increased by the end of last week, with the yield on 10-year Treasuries dropping 10 basis points, while the price of gold climbed about 1.7%.

The price of crude oil (WTI) increased last week, closing at $53.83 per barrel, up from the prior week’s closing price of $53.10 per barrel. The price of gold (COMEX) increased for the first time in several weeks, closing at $1,152.40 by late Friday afternoon, up from the prior week’s price of $1,133.30. The national average retail regular gasoline price increased for the fourth week in a row to $2.309 per gallon on December 26, 2016, $0.045 more than last week’s price and $0.275 higher than a year ago.

Market/Index 2015 Close Prior Week As of 12/30 Weekly Change YTD Change
DJIA 17425.03 19933.81 19762.60 -0.86% 13.42%
Nasdaq 5007.41 5462.69 5383.12 -1.46% 7.50%
S&P 500 2043.94 2263.79 2238.83 -1.10% 9.54%
Russell 2000 1135.89 1371.51 1357.13 -1.05% 19.48%
Global Dow 2336.45 2536.42 2528.21 -0.32% 8.21%
Fed. Funds target rate 0.25%-0.50% 0.50%-0.75% 0.50%-0.75% 0 bps 25 bps
10-year Treasuries 2.26% 2.54% 2.44% -10 bps 18 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

  • Once again, a strong dollar has led to a widening trade gap as imports are outpacing exports. The Census Bureau’s advance report on international trade in goods has the trade deficit at $65.3 billion in November, up $3.4 billion from October. Exports of goods for November were $121.7 billion, $1.2 billion less than October exports. Imports of goods for November were $187.0 billion, $2.2 billion more than October imports. Inventories of wholesale and retail goods in November were up 0.9% and 1.0%, respectively, over October.
  • Consumer confidence in the economy increased in December, according to The Conference Board Consumer Confidence Index®. The index for December was 113.7 — up from November’s 109.4. The Expectations Index reached a 13-year high, jumping from 94.4 in November to 105.5 in December. Following the presidential election, consumers have expressed optimism for the economy, jobs, and stock prices.
  • In the week ended December 24, the advance figure for seasonally adjusted initial unemployment insurance claims was 265,000, a decrease of 10,000 from the previous week’s unrevised level of 275,000. The advance seasonally adjusted insured unemployment rate remained at 1.5%. The advance number for seasonally adjusted insured unemployment during the week ended December 17 was 2,102,000, an increase of 63,000 from the previous week’s revised level.

Eye on the Week Ahead

Trading volume is expected to pick up entering the first full week of 2017. The last reports of 2016 on the employment situation and international trade close the week.