Monthly Archives: December 2014

Market Insights 12/31/2014 – Happy New Year

Early Gains Disappear

The U.S. equity markets gave up early gains and closed the final trading session of 2014 in the red. Identifying the catalyst for the change in price direction may prove a futile endeavor as volume was on the lighter side with all U.S. markets set to be shuttered tomorrow in observance of New Year’s Day and as the domestic bond markets traded in a shortened session.

Conflicting data from the domestic economic docket showed disappointing reads on jobless claims and regional manufacturing activity and a better-than-expected November pending home sales report. Treasuries were modestly higher, while notable news from the equity front was nearly nonexistent. Gold and crude oil prices were lower and the U.S. dollar was higher.

The Markets…

The Dow Jones Industrial Average declined 160 points (0.9%) to 17,823

The S&P 500 Index decreased 21 points (1.0%) to 2,059, all 10 S & P sectors finished in the red with Utilities giving back the most followed by Consumer Staples and Financials.

Small and Midcaps fared no better with the MidCap 400 down 1.05% and the SmallCap 600 giving back .71% to end the year

The Nasdaq Composite was 41 points (0.9%) lower at 4,736

In moderately light volume, 576 million shares were traded on the NYSE, and 1.4 billion shares changed hands on the Nasdaq

WTI crude oil decreased $0.85 to $53.27 per barrel, wholesale gasoline was unchanged at $1.47 per gallon

The Bloomberg gold spot price decreased $17.61 to $1,182.94 per ounce

Jobless claims and manufacturing reports disappoint, while housing sales top estimates

Weekly initial jobless claims rose by 17,000 to 298,000 last week, above the 290,000 level that economists surveyed by Bloomberg had expected, as the prior week’s figure was upwardly revised by 1,000 to 281,000. Moreover, the four-week moving average, considered a smoother look at the trend in claims, ticked higher by 250 to 290,750, while continuing claims fell by 53,000 to 2,353,000, south of the forecast of economists, which called for a level of 2,368,000.

The Chicago Purchasing Managers Index showed growth in Midwest activity decelerated more than expected, declining to 58.3 for December, from 60.8 in November, and versus expectations of a decline to 60.0, though a reading above 50 depicts growth.

Pending home sales rose 0.8% month-over-month in November, versus the projected 0.5% gain, and following the downwardly revised 1.2% drop registered in October. Compared to last year, sales were 1.7% higher last month, versus the 3.6% rise that was anticipated, and following October’s downwardly revised 2.1% gain. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which fell more than expected in November.

Treasuries were modestly higher following today’s shortened session, with the yields on the 2-year and 10-year notes dipping 2 basis points to 0.67% and 2.17%, respectively, while the 30-year bond rate was 1 bp lower at 2.75%.

Europe pares monthly decline in shortened session, Asia mixed to end the year

The European equity markets pared their losses for the month that have come from the impact on the energy sector of the sharp sell-off in crude oil prices and the recent flare-up in political uncertainty in Greece after the nation failed to elect a president. The result fostered concerns that an anti-austerity party in the nation could gain control and potentially impact the composition of the European Union. The anti-austerity movement in Greece could raise doubts about the European Central Banks’s (ECB) decision to buy government bonds in early 2015. Some at the ECB object to buying government bonds from countries that aren’t committed to financial reform and may not meet their debt obligations. However, the recent easing of fiscal terms for France and Italy are a sign that the ECB will likely step up bond buying regardless of the outcome of the Greek election.

However, the Stoxx Europe 600 Index managed to post a gain 4.3% for the year, with sentiment buoyed by expectations that the ECB will step up stimulus efforts, including speculation that the central bank could deploy a full-blown quantitative easing campaign by expanding its asset purchases to include sovereign debt. Meanwhile, volume in today’s trading session in Europe was light, with markets in Germany, Italy and Switzerland closed for the New Year’s Day holiday, while other major markets closed early.

The U.K. FTSE 100 Index was up 0.3%, France’s CAC-40 Index gained 0.6%, Spain’s IBEX 35 Index finished flat, and Greece’s ASE Athens Index traded 1.2% higher.

Stocks in Asia finished mixed in the final trading session of the year, though volume was light with a plethora of markets in the region closed for holidays, including Japan and South Korea. China’s Shanghai Composite Index rallied despite a lackluster read on the nation’s manufacturing output and as the final HSBC China Manufacturing PMI Index improved slightly to 49.6 for December, from the 49.5 level estimated in the preliminary report, but below the 50.0 level recorded in November. A reading below 50 denotes contraction. The Shanghai Composite Index was the best performer among the major global markets this year, surging 53.0% to exceed the performance of 93 world indexes tracked by Bloomberg. China’s mainland stocks were bolstered this year by surprising rate cuts from the People’s Bank of China and the commencement of the trading link between the Hong Kong and Shanghai exchanges.

The January Barometer

Do you want to know how stocks might perform next year? A widely followed market theory, the January barometer, claims that as January goes, so goes the year. Indeed, the market gained 30% in 2013, after surging nearly 7% in January. But in January of 2014 we lost nearly 3.5% but will end the year with a nice 12-13% return.

Interestingly enough, while an up January is generally bullish for stocks, a down January is not a reliable predictor of a weak year overall. In ten out of twenty-four weak January years, the stock market actually ended higher, often by a very substantial amount. This has happened four times in the last decade alone.

A Bullish Start is the Stronger Predictor

Why might up Januaries be better predictors than down ones? One reason may be the historical proclivity of stocks to rise: Stocks have finished higher in all but 14 out of 64 years since 1950. So, the fact that stocks finish higher for the year so often after both a positive and negative January may simply be the result of this directional bias.

There is a very strong correlation between positive January S&P 500® Index performance and positive market performance for the entire year. In fact, the January barometer has held true 37 of the 39 times since 1950 when January experienced market gains. Only during two years have stocks dropped sharply after a positive January (1966 and 2001), with both instances occurring at the end of powerful multi-year market advances.

Momentum is one possible reason that positive stock performance during January may actually be a reliable predictor for full-year performance. If the market gets off to a good start, a bullish trading pattern can form, and that can help fuel continued positive performance, at least through the early months, as investors jump on the trend. From a historical perspective, there is no clear evidence as to why a negative start does not more strongly imply a negative year, compared with the high correlation of a positive January translating to a positive year.

Recent Performance

For evidence of the January barometer’s potential predictive power, traders can look at the last couple of years. In addition to the exemplary 2013, the S&P 500 gained 4.4% in January 2012. That had been the largest January gain since 1997, and stocks continued to rally throughout the year, rising 13%.

In 2013, energy and health care sectors led the way through most of January, while telecom, technology, and utilities lagged (although they were all still in the green). By the end 2013, health care and consumer discretionary were the top-performing sectors. Look at January 2014, consumer discretionary and consumer staples were among the worst-performing sectors, while defensive sectors (health care and utilities) were the only groups that managed to stay out of the red and it looks like they will have had stellar 2014′s. Utilities will be the #1 performing sector in 2014 advancing 26.5% and HealthCare will be #2 moving 24.5% higher.

First Five Days

Some proponents of the January barometer believe in the “first five days” theory, which predicts that the first five days of January will point the way for the rest of the year. Over the first five days of 2014, the S&P 500 lost about a half of one percent.

The problem with this theory is that there is significantly less historical evidence, compared with the January barometer, to support that the first five days of January are a reliable predictor of the rest of the year. Additionally, given the small number of trading days, there is not enough time for momentum to be a significant factor.

Investing Implications

Volatility certainly picked up during January of 2014. The CBOE Volatility Index (VIX)—the “fear index” as it is widely known—spiked nearly 40%. Emerging market concerns, a steady draw-down in Fed support, and some softer-than-expected earnings are all factors that gave the market a jolt in January. What happens this January is certainty worth noting as the month unfolds.

The January barometer provides an easily identified outcome, but crafting a strategy solely on this theory is not prudent, particularly after a down January. We also need to pay attention to the factors that affect the business cycle and create trading patterns.

Market Insights 12/30/2014

Equities Edge Lower, One Trading Left in 2014

The U.S. equity markets closed the trading session lower on lighter-than-average volume as traders look to wrap up the year with only one trading day remaining in 2014. Treasuries advanced on the pullback for stocks with bonds set to trade tomorrow in a shortened session, while some domestic economic reports showed that Consumer Confidence and housing prices increased from the prior month. Gold and crude oil prices were higher, while the U.S. dollar was lower.

The Markets….

The Dow Jones Industrial Average declined 55 points (0.31%) to 17,983

The S&P 500 Index decreased 10 points (0.49%) to 2,080

The Nasdaq Composite was 29 points (0.61%) lower at 4,777

Small and MidCaps followed the broder markets downward with the MidCap 400 off by .45% and the Small Cap 600 giving back .37%

In moderately light volume, 535 million shares were traded on the NYSE, and 1.2 billion shares changed hands on the Nasdaq

WTI crude oil advanced $0.51 to $54.12 per barrel, wholesale gasoline was unchanged at $1.47 per gallon

The Bloomberg gold spot price increased $15.63 to $1,198.92 per ounce

Consumer Confidence improves modestly, while home prices top expectations

The Consumer Confidence Index rose to 92.6 in December, from an upwardly revised 91.0 in November and compared to the projected 93.9 level of economists surveyed by Bloomberg. The improved confidence came as a solid month-over-month gain in the component pertaining to the present situation more than offset a dip in expectations of business conditions. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—improved to -10.6 from -12.5 last month.

The 20-city composite S&P/Case-Shiller Home Price Index showed a rise in home prices of 4.5% year-over-year in October, compared to the 4.4% increase that economists had expected. Moreover, month-over-month, home prices were higher by 0.8% on a seasonally adjusted basis for October, exceeding forecasts calling for a 0.4% increase.

Treasuries were higher, with the yield on the 2-year note dipping 2 basis points to 0.69%, while the yields on the 10-year note and the 30-year bond declined 1 bp to 2.19% and 2.76%, respectively.

The U.S. economic front will be somewhat slow to start 2015, with the typical first Friday jobs report coming instead on the second Friday in January and all U.S. markets closed on Wednesday in observance of the New Year holiday. Tomorrow, the final day of 2014 will bring the release of pending home sales, with economists expecting the pipeline of existing home sales to increase 0.5% m/m during November, following the unexpected 1.1% decline the month prior. Also on tap is the Chicago Purchasing Manager Index, which is forecasted to tick slightly lower in December to a level of 60.0 from the 60.8 posted in November, but a reading above 50 denotes expansion in regional activity. Finally, the latest weekly read for initial jobless claims will be delivered, forecasted to increase to a level of 290,000 from 280,000.

Europe and Asia lower on oil and Greek political uneasiness

The European equity markets traded broadly lower, with oil & gas stocks leading the way in the wake of the persistent drop in oil prices, which sit at more than 5-year lows. Sentiment also remained hampered by the weekend’s failure for Greece to elect a president for the third and final attempt, sending the country toward general elections next month. The failed election is fostering concerns about the potential for an anti-austerity party to gain control, which could impact the composition of the Eurozone. The anti-austerity movement in Greece could raise doubts about the European Central Banks’s (ECB) decision to buy government bonds in early 2015. Some at the ECB object to buying government bonds from countries that aren’t committed to financial reform and may not meet their debt obligations. However, the recent easing of fiscal terms for France and Italy are a sign that the ECB will likely step up bond buying regardless of the outcome of the Greek election.

The U.K. FTSE 100 Index was down 1.3%, Germany’s DAX Index dropped 1.2%, France’s CAC-40 Index fell 1.7%, Spain’s IBEX 35 Index declined 1.1%, Italy’s FTSE MIB Index and Switzerland’s Swiss Market Index descended 0.6%, and Greece’s ASE Index decreased 0.5%.

Stocks in Asia finished lower as the continued slide in oil weighed on energy-related issues, while the political uncertainty in Greece also hamstrung sentiment. Japan’s Nikkei 225 Index pared its yearly gain in light volume on the final trading session of the year as the island nation’s markets will be closed for the rest of the week. Japanese stocks shrugged off news late yesterday that the government will cut its corporate tax rate by 3.29 percentage points over the next two years.

Chinese securities dipped amid weakness in technology and utilities stocks, while the Hong Kong Hang Seng Index fell on the heels of yesterday’s report that showed the nation’s trade deficit widened more than expected in November as exports rose by a much smaller rate than projected. Also, Australian oil & gas stocks came under pressure, while South Korean equities declined despite a stronger-than-estimated read on the country’s industrial production for November.

Market Insights 12/29/2014

Markets Start Week Mostly Unchanged

U.S. equities finished the first day of another holiday-shortened week mixed and nearly unchanged on lower-than-normal volume amid some weakness in technology issues, while crude oil prices reversed to the downside to close below the $55 per barrel mark. The lone report on today’s domestic economic calendar showed regional manufacturing growth slowed more than expected. Treasuries finished higher, as did the U.S. dollar, while gold was lower.

The Markets…

The Dow Jones Industrial Average declined 15 points (0.10%) to 18,038

The S&P 500 Index advanced 2 points (0.09%) to 2,089, sectors leading the index higher included Utilities +1.15%, Consumer Discretionary +.76% and Energy +.36% while Technology -.50% and Consumer Staples -.30% provided the drag.

Over the past month the Utility sectors has been the big winner advancing by 6.65% while Energy has been the largest loser declining by 6.08% while 7 of the 10 S&P 500 sectors have moved higher.

Small and Midcaps continued their trend of fairing better than large caps with the MidCap 400 higher by .44% and the Small Cap 600 advancing .40%

The Nasdaq Composite was unchanged at 4,807

In light volume, 539 million shares were traded on the NYSE, and 1.2 billion shares changed hands on the Nasdaq

WTI crude oil fell $1.12 to $53.61 per barrel, wholesale gasoline lost $0.05 to $1.47 per gallon

The Bloomberg gold spot price declined $14.26 to $1,181.74 per ounce

Regional manufacturing growth slows more than expected

The Dallas Fed Manufacturing Index showed growth in activity for the region slowed more than expected, dropping to 4.1for December, from November’s 10.5 level, compared to the 9.0 figure that was forecasted by economists surveyed by Bloomberg, though readings above zero denote expansion. The report showed growth in production and capacity utilization both accelerated, while output in new orders decelerated, and orders growth rate, unfilled orders and inventories all depicted contraction.

Treasuries finished higher, as the yields on the 2-year and 10-year notes, along with the 30-year bond, all declined 4 basis points to 0.71%, 2.21% and 2.78%, respectively.

Tomorrow’s economic calendar will include the S&P/Case-Shiller Home Price Index, forecasted to show prices in the 20-city composite rose 4.5% year-over-year for the month of October, while month-over-month prices are expected to have increased 0.6% on a seasonally-adjusted basis. Additionally, Consumer Confidence will be reported, with economists expecting a reading of 93.0 for December, up from the 88.7 level registered in November.

Europe and Asia finish mixed

The European equity markets finished mixed, as the major markets overcame early pressure with U.S. stocks holding near record high levels. Mining issues gained solid ground following late last week’s rebound in metals prices and reports over the weekend that China may further ease lending requirements. Volume was lighter than usual with the markets returning from an extended holiday weekend. Greek stocks and peripheral Eurozone markets came under pressure after Greece failed for the third and final time to elect a president, sending the country toward general elections early next year. The election result fostered political uncertainty and concerns an anti-austerity party could gain control.

Stock markets tend to deliver above-average gains in the last two weeks of the year, but the Greek election is one of a few risks to watch. Jeff adds that the anti-austerity movement in Greece could raise doubts about the European Central Banks’s (ECB) decision to buy government bonds in early 2015. Some at the ECB object to buying government bonds from countries that aren’t committed to financial reform and may not meet their debt obligations. However, the recent easing of fiscal terms for France and Italy are a sign that the ECB will likely step up bond buying regardless of the outcome of the Greek election.

The U.K. FTSE 100 Index was up 0.4%, Germany’s DAX Index and Switzerland’s Swiss Market Index ticked 0.1% higher, and France’s CAC-40 Index rose 0.5%, while Spain’s IBEX 35 Index decreased 0.8%, Italy’s FTSE MIB Index dropped 1.2%, and Greece’s ASE Athens Index fell 3.9%.

Stocks in Asia finished mixed following another round of record highs in the U.S. last week. Japanese equities declined after losing ground in late-day action amid reports of a potential Ebola case in Tokyo. However, after the closing bell, the Japan Health Ministry confirmed that tests of the man for Ebola came in negative. Japanese shares gained ground early in the session after Prime Minister Abe announced on Saturday the approval of a $29 billion stimulus package aimed at boosting consumer spending and regional economic activity.

Chinese shares moved higher, aided by reports that the People’s Bank of China may further ease lending requirements. Australia’s markets gained ground, returning from a long Christmas holiday break, led by mining issues, which rebounded amid the recent rise in metals prices, and retail-related stocks on optimism regarding the holiday shopping season, while the lone economic item of note in the region showed confidence in South Korea’s manufacturing sector improved for January.

Market Insights 12/26/2014 – Friday

Stocks Gain, Traders Cheer, Three Trading-Days Left This Year

After pausing in observance of the Christmas holiday, the U.S. equity markets closed higher on lighter than usual volume, returning to action in similar fashion to how they began the week.

The Dow and S&P 500 again logged all-time closing highs despite the lack of a fresh catalyst and in the absence of any corporate earnings or economic reports being scheduled for release today.

Treasuries were slightly higher in spite of the advance for stocks and the U.S. dollar was nearly unchanged, while crude oil prices continued to slide and gold was higher. Overseas, the European equity markets were closed, while China’s Shanghai Composite index rose to its biggest two-day gain in five years.

The Markets…

The Dow Jones Industrial Average increased 24 points to 18,053

The S&P 500 Index advanced 7 points (0.3%) to 2,089, sectors winners on the day included Utilities +1.21%, HealthCare +.71% and Consumer Discretionary +.54%, while Energy -.03% was the only sector in the red. However, for the week Energy lead the way with a 4% gain followed by Technology and utilities with all 10 sectors of the S & P 500 in the green for the week.

The Nasdaq Composite ascended 33 points (0.7%) to 4,807

In light volume, 437 million shares were traded on the NYSE, and 920 million shares changed hands on the Nasdaq

WTI crude oil fell $1.11 to $54.73 per barrel, wholesale gasoline lost $0.01 to $1.52 per gallon

The Bloomberg gold spot price increased $21.20 to $1,195.00 per ounce

Markets were higher on the week, as the DJIA gained 0.5%, the S&P 500 Index ascended 0.5% and the Nasdaq Composite Index increased 0.6%

Since the 2008 market crash, stocks have risen fairly steadily and impressively, with 2014 set to mark another year of solid gains. This may be one of the most doubted rallies in the history of Wall Street, as numerous record highs in major indices have been met with skepticism. Although some near-term sentiment indicators are showing heightened optimism, digging deeper reveals quite a bit of investor skepticism with regard to stocks longer term. The “wall of worry” stocks like to climb remains intact and reinforces our relatively positive equity outlook for at least the first half of 2015.

U.S. economic calendar empty to close out the week

This week, equities continued to add to their gains that ensued on the heels of last week’s reiteration from the Federal Reserve that it will be patient about raising interest rates. Stocks continued to close above record levels throughout the holiday-shortened week amidst the backdrop of an improving domestic economy. On Tuesday, the third and final look at 3Q GDP for the U.S. displayed a quarter-over-quarter annualized rate of growth of 5.0%, the largest gain since 2003. Personal consumption came in nicely above forecasts, personal income grew inline with projections and personal spending increased more than expected.

However, the data wasn’t all cheery as existing and new home sales were lower than the preceding month and registered levels that came in south of economists’ forecasts. Durable goods orders also surprised investors with an unanticipated contraction from the previous month and a read on consumer sentiment was reported to be just shy of estimates.

In recent weeks, we finally saw what we have been looking for during this economic expansion: improved business confidence and a willingness to spend more on capital improvements. Global growth concerns could start to have a bigger impact in the U.S., which could cause companies to pull back on spending again. We don’t believe that’s a high probability at this point, with Japan, China, and the Eurozone central banks all taking steps to stimulate their economies, but we are watching those risks carefully.

Treasuries were slightly higher, with yields lower, while the U.S. economic calendar was void of any major releases today. The yield on the 2-year note was flat at 0.74%, while the yields on the 10-year note and the 30-year bond decreased 2 basis points to 2.25% and 2.81%, respectively.

Economic calendar to ease into 2015

Next week, we will again have a holiday reduce the standard number of trading days as all U.S. markets will be closed on Thursday in observance of the New Year, while bond markets will also be closing early at 2 p.m. ET on Wednesday. Despite the shortened week, the domestic economic calendar will release data before and after the mid-week break, with the highlight likely to be Friday’s release of the ISM Manufacturing Index for December, as the usual first Friday jobs report will be coming instead on the second Friday in January.

Other releases on next week’s U.S. economic calendar include: Markit’s U.S. Manufacturing PMI Index, the Dallas Fed Manufacturing Index, the S&P/Case-Shiller Home Price Index, the Chicago PMI Index, weekly MBA mortgage applications and jobless claims, pending home sales, construction spending and consumer confidence.

Asia higher to close out the week as Europe stays shuttered

Though markets in Europe were closed, stocks in Asia finished in the green to close out the holiday-shortened week, with China’s Shanghai Composite Index rising 2.8% to lead the way in its biggest two-day gain in five years. The advance in China arose amid speculation that the government may take more measures to bolster the economy and a drop in money-market rates. We remain cautiously optimistic on Chinese equities but are cautious in the near term due to the rapid gains in prices recently. Chinese equities could benefit from further stimulus and still have relatively low valuations compared to other equity markets around the world.

Japanese equities advanced on lighter than usual volume as Japanese equities eked out a gain as the yen weakened toward a seven-year low versus the U.S. dollar. Investors weighed the data from a plethora of releases that showed the island nation’s industrial production and retail sales for November unexpectedly fell from the prior month, national and regional CPI reads were inline with forecasts and vehicle production continued to decline from the previous year’s levels.

Here’s how stocks and bond yields could rise together

It’s a widely held expectation that stocks should fall as bond yields rise, but history — and recent experience — shows that isn’t necessarily so. That could mean equities could continue their unprecedented bull run in 2015 as the Federal Reserve moves toward widely expected rate hikes.

The phenomenon was on display in the wake of Wednesday’s Federal Reserve meeting. Treasury prices were lower, pushing yields higher, as Fed Chairwoman Janet Yellen signaled rates might begin to rise a bit sooner than had been expected. At the same time, the S&P 500 and the Dow Jones Industrial Average DJIA, staged the biggest two-day rally in years, taking comfort in Yellen’s reassurance that a rate rise would be slow and gradual.

A scenario, however, in which stocks and bond yields rise together doesn’t represent such an unusual disconnect. It comes down to the reason why the Fed is raising interest rates. When yields rise because the central bank is scrambling to rein in inflation, stocks can certainly suffer. It is a different story, however, if yields are rising because the economy is picking up steam. Contrary to popular belief it’s not a bad environment; in fact, it’s a good environment for stocks.

The outlook changes if inflation gets baked into longer-term interest rates. That isn’t a huge concern right now with investors and central bankers focused on dis-inflationary and potentially deflationary impulses, which have only been amplified by a plunge in oil prices.

Looking back at previous market tops, long bonds don’t begin to offer stiff competition to equities until yields reach 3% or even 4%.

In fact, the correlation between bonds and stocks has been positive since the end of the past recession. Rising stock returns alongside rising bond yields is a seeming contradiction of the so-called Fed model. That valuation model generally holds that stocks should trade lower as bond yields rise.

Low-rate environment positive for stocks

The analysts found, however, that in a low-rate environment, stock price-to-earnings ratios actually rise with bond yields.

“Only when 10-year bond yields rise above 5% should we expect Fed-model consistent behavior,” they said, in a November note. They expect any rise in bond yields to remain subdued as central bankers outside the U.S. continue to add liquidity to the system, which should continue to fuel demand for Treasuries.

Strategists at Deutsche Bank also see rates rising in 2015 alongside stocks. They observed that there have been long periods of both positive and negative correlations between rates and equity P/Es (see chart above).

Indeed, they note that it’s inflation that has been “consistently and strongly negative” for equities, though the relationship has been modest when inflation is low. Meanwhile, higher real rates — interest rates minus inflation — have been positive for equities. They found that he only time that relationship was clearly negative was between 1981 and 1986, when the Paul Volcker-led Fed pushed interest rates to nosebleed levels in an effort to quell inflation.

That said, analysts note that stocks do tend to see at least some temporary pressure when the Fed delivers its first rate hike.

12/24/2014 – Merry Christmas

Stocks Nearly Unchanged in Shortened Session

The U.S. equity markets closed the day nearly unchanged with the Dow giving investors another dose of holiday cheer in the form of a new all-time closing high.

Volume was on the lighter side as ’tis the season that had markets closing early today and will keep them shuttered tomorrow in observance of the Christmas holiday.

Treasuries were nearly unchanged as the U.S. economic calendar showed an unexpected drop in weekly jobless claims and an increase in weekly mortgage applications. Gold and crude oil prices were lower, while the U.S. dollar was nearly unchanged.

The Markets…

The Dow Jones Industrial Average gained 6 points (+.03%) to 18,030

The S&P 500 Index was flat at 2,082, sectors leading the way higher included Utilities (+1.85%) and HealthCare (+.73%) while Energy was the largest loser of the day giving back -.73%

Small and MidCaps faired better with the MidCap 400 higher by .18% and the SmallCap 600 was higher by .21%

The Nasdaq Composite increased 8 points (0.17%) to 4,773

In light volume, 348 million shares were traded on the NYSE, and 721 million shares changed hands on the Nasdaq

WTI crude oil fell $1.98 to $55.15 per barrel, wholesale gasoline lost $0.05 to $1.53 per gallon

The Bloomberg gold spot price decreased $2.22 to $1,174.35 per ounce

Jobless claims decline, mortgage applications rise

Weekly initial jobless claims decreased by 9,000 to 280,000 last week, below the 290,000 level that economists surveyed by Bloomberg had expected, as the prior week’s figure was un-revised at 289,000. The four-week moving average, considered a smoother look at the trend in claims, declined by 8,500 to 290,250, while continuing claims increased by 30,000 to 2,403,000, north of the forecast of economists, which called for a level of 2,375,000.

The recent plunge in oil prices are generally a good thing for consumers, but they can also mean fewer jobs are created in the energy-producing areas. A sharp downturn was reported for the weekly total of oil and gas rigs operating in the United States. It may be just the beginning of cutbacks since there is usually a lag of about 18 weeks between oil prices and the number of rigs in operation. However, we feel the benefits of more money in the consumers pocket as a result of flower fuel cost far outweigh an uptick in in the oil and gas unemployment rate.

The MBA Mortgage Application Index increased 0.9% last week, after falling by 3.3% the previous week. The increase came as the Refinance Index improved 1.1% and the Purchase Index advanced 1.3%, while the average 30-year mortgage rate dropped 4 basis points to 4.02%.

Treasuries were nearly unchanged with the yields on the 2-year and 10-year notes flat at 0.74% and 2.26%, respectively, while the 30-year bond rate lost 2 bps to 2.83%.

Please note: In observance of the Christmas holiday the domestic stock markets will close early today at 1:00 p.m. ET and the bond markets will trade in a shortened session, closing at 2:00 p.m. ET, while all U.S. markets will be closed tomorrow and will return to normal session hours on Friday.

Europe sees little action on early close

The European equity markets had little changed with light volume prevailing in a shortened trading session ahead of tomorrow’s Christmas holiday, with markets in Germany, Italy and Switzerland closed today. In regional economic news, French jobless claims rose to a record in November according to a report from the Labor Ministry.

The U.K. FTSE 100 Index was up 0.2%, France’s CAC-40 Index declined 0.4% and Spain’s IBEX 35 Index was nearly unchanged.

Stocks in Asia mostly higher

Stocks in Asia finished broadly higher, though Chinese equities bucked the trend, on the heels of the stronger-than-expected GDP report from the U.S. yesterday that pushed the Dow to its first ever close over 18,000. Japan’s Nikkei 225 Index returned to action after being closed for a holiday the previous session, advancing 1.2% as the yen strengthened versus the U.S. dollar, ending a five-day advance for the greenback. China’s Shanghai Composite Index suffered its worst two-day decline in over a year, falling 2.0% in today’s trading amid some concerns that the government may be taking measures to prevent a possible bubble by limiting the use of credit to buy stocks. Australia’s S&P/ASX 200 Index rose 0.3% in a shortened session and South Korea’s Kospi Index gained 0.4%, however, India’s S&P BSE Sensex 30 Index declined 1.1% amid thin trading ahead of tomorrow’s Christmas holiday, which will cause most markets in the region to be closed, while mainland Chinese and Japanese markets will be open.

ETFs Top $2 Trillion in U.S. For First Time

ETFs have crossed a symbolic milestone, topping $2 trillion in assets under management in trading as of Monday, December 22nd, 2014 as institutional and retail investors increasingly relied on the funds for exposure to capital markets.

The exchanged-traded fund industry this year has broken its previous asset-gathering record, bringing in $232 billion, beating 2013′s $190 billion, according to data Tuesday by ETFGI, a London-based industry consultancy. The $2 trillion figure was also reported by ETF.com.

Exchange-traded funds and related products increased assets 18% this year, as of Dec. 22, driven by rising financial markets, and new assets from financial advisers and institutional investors, ETFGI said.

The milestone is seen as a coming-of-age for the funds, which started as a dream to trade entire financial markets with the ease of buying or selling a single stock or commodity. Since securities regulators approved the first U.S.-listed ETFs in 1993, the products have been adopted by a wide range of clients, from hedge funds looking to make short-term bets to individual investors who want to “buy and hold” the markets.

Financial advisers have been a key part of the growth. Wirehouses, independent registered investment advisers and independent broker-dealers together accounted for $1 trillion in assets in ETFs as of Sept. 30, according to Broadridge Financial Solutions Inc., a data service.

But analysts said gathering the next $2 trillion may depend on broader changes, including the success of proposals for actively managed funds that wouldn’t have to disclose their holdings and adoption of the funds within closed platforms, such as those supporting defined-contribution retirement plans.

Dave Mazza, head of research at State Street Corp.’s asset management group, said one of the major factors in ETF growth this year was broader use in asset categories like fixed-income.

Fixed-income ETFs took in $48.7 billion in the first 11 months of the year, compared with $12.6 billion over the same period last year. That compares with $143.7 billion that went into equity ETFs over the same period, according to BlackRock Inc.

Mr. Mazza said the technology surrounding retirement accounts remains an obstacle to ETFs’ growth and that their broader adoption in retirement accounts would promote “another rapid” uptake in the funds, possibly at the expense of mutual funds.

Mutual funds managed $15 trillion at the end of 2013, according to the Investment Company Institute.

Market Insights 12/23/2014

GDP Surprise Pushed Markets Higher

The U.S. equity markets finished mixed, as a throng of varied economic data hit the Street ahead of tomorrow’s shortened session, and as all U.S. markets will remain closed in observance of the of the Christmas holiday. The final look on 3Q GDP posted its largest gain since 3Q of 2003, while personal income was inline with expectations and spending was slightly higher than expectations.

Meanwhile, regional manufacturing accelerated, consumer sentiment mostly matched expectations, but durable goods orders disappointed and new home sales surprisingly fell.

Treasuries were solidly lower following the data, while crude oil prices and the U.S. dollar were higher, and gold lost modest ground.

The Markets…

The Dow Jones Industrial Average gained 65 points (0.36%) to 18,024

The S&P 500 Index was 4 points (0.17%) higher at 2,082, 9 of the 10 S&P sectors were higher with Healthcare (-2.29%) the only laggard. Moving the Index higher were Energy +1.22%, Materials +.78% and Consumer Staples .69%.

Small and Micaps outpaced larger caps with the SmallCap 600 higher by .41% and the MidCap 400 better by .38%

The Nasdaq Composite declined 16 points (0.34%) to 4,765

In moderately light volume, 686 million shares were traded on the NYSE, and 1.6 billion shares changed hands on the Nasdaq

WTI crude oil rose $1.86 to $57.12 per barrel, wholesale gasoline gained $0.03 to $1.57 per gallon

the Bloomberg gold spot price decreased $2.76 to $1,173.68 per ounce

Durable goods orders disappoint, GDP surprises to kick off heavy economic day

Durable goods orders fell 0.7% month-over-month in November, compared to the 3.0% increase that was expected by economists surveyed by Bloomberg, while October’s 0.4% advance was revised unfavorably to a 0.3% increase. However, ex-transportation, orders declined 0.4% m/m in November, versus the forecast of a 1.0% gain, while October’s figure was downwardly revised to a 1.0% decrease, from the 0.9% decline initially reported. Finally, orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, was unchanged last month, compared to the 1.0% increase that was projected, while the 1.3% drop in October was revised to a 1.9% decline.

The final look (of three) at 3Q Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of growth of 5.0%, revised up from the 3.9% expansion reported in the first report, and the largest gain since 3Q 2003. This compared to the upwardly adjusted 4.3% increase that was forecasted by economists surveyed by Bloomberg. 2Q GDP expanded by an unrevised 4.6%. Also, personal consumption came in above forecasts at a 3.2% gain for 3Q, from the 2.2% increase that was previously reported, and compared to the 2.4% rise that was projected. Personal consumption grew by an unrevised 2.5% in 2Q.

On inflation, the GDP Price Index held steady at a 1.4% increase, with economists anticipating an unadjusted reading, while the core PCE Index, which excludes food and energy, was also unadjusted at the initially reported 1.4% gain.

Personal income grew by 0.4% m/m in November, inline with what economists had projected, while October’s 0.2% rise was revised to a gain of 0.3%. Personal spending rose by 0.6% m/m last month, versus expectations of a 0.5% gain, while October’s 0.2% decline was revised to an increase of 0.3%. The November savings rate as a percentage of disposable income fell to 4.4% from the 4.6% posted in October. Meanwhile, the PCE Deflator was down 0.2% m/m in November, matching forecasts, while October’s reading of a 0.1% increase was adjusted to a flat reading. Compared to last year, the deflator was 1.2% higher, inline with expectations. Excluding food and energy, the PCE Core Index was flat, compared to forecasts of a 0.1% rise, and the index was 1.4% higher y/y, versus expectations of a 1.5% rise.

New home sales fell 1.6% m/m in November, to an annual rate of 438,000 units from October’s downwardly revised 445,000 unit pace, and compared to the expected 460,000 rate. Within the report, the median home price rose 4.5% y/y and was down 0.3% m/m at $280,900. The 213,000 units of new home inventory was 15.1% higher y/y, representing a rate of 5.8 months of supply at the current sales pace, up from the 5.7 figure posted for the previous month. New home sales are considered a timely indicator of conditions in the housing market as they are based on contract signings instead of closings. Regionally, m/m sales in the Midwest fell 6.3% and Northeast sales were 12.0% lower, while the South saw a 10.4% decline, but sales in the West were 14.8% higher.

The final University of Michigan Consumer Sentiment Index was revised lower to 93.6 from the preliminary level of 93.8 for December, but ahead of the expected 93.0 level, and compared to the 88.8 reading posted in November. The lackluster report came as both the components pertaining to current economic conditions and the economic outlook were revised lower. On inflation, the 1-year expectation was revised higher to 2.8% from 2.6%, and compared to October’s 2.9% figure, while the 5-year inflation outlook was adjusted to 2.8% from the prior 2.6%, slightly lower that the 2.9% rate posted last month.

Treasuries finished lower, with yields moving higher, following the flood of data, as the yield on the 2-year note was up 2 basis points to 0.73%, and the yields on the 10-year note and the 30-year bond increased 10 bps to 2.26% and 2.865%, respectively.

The week’s economic calendar will wrap up tomorrow, with weekly initial jobless claims forecasted to rise to a level of 290,000 from the prior week’s 289,000, as well as MBA Mortgage Applications.

Glancing Back but Focusing Forward

The Fed remains dovish but is likely to begin raising rates in 2015, the first time since before the financial crisis. We believe stocks will continue to climb in 2015, but risks remain, including an inflation scare, global geopolitical concerns and a cautious consumer. With a dovish Fed, which is expected to become even more dovish after next year’s annual rotation, and lower oil prices depressing headline inflation, wage inflation could start to creep higher as the labor market continues to tighten. We don’t think we’ll actually have an inflation problem, but a scare is possible and could make markets more volatile in the early half of 2015.

Europe finished higher getting boost from U.S. GDP data

The European equity markets advanced for a sixth-straight day, getting a boost from a surprising revision to U.S. 3Q GDP. Meanwhile, economic news in the region was a mixed bag, as France’s 3Q GDP showed an unrevised 0.3% q/q growth rate, inline with expectations, wholesale prices for the nation also matched economists’ estimates and consumer spending increased for the month, while retail sales in Italy were flat. As well, the U.K. posted an un-adjusted GDP growth rate of 0.7%, which matched forecasts, and household spending in the country rose 0.9%, its highest reading in over four years.

Stocks in Greece tumbled after the country’s Prime Minister failed to win two-thirds support in parliament in a second vote, prompting a third and final vote to be held on Monday. If the Prime Minster is unsuccessful in acquiring at least 180 votes of the 300-seat chamber, the nation’s parliament will be dissolved and general elections will be called within ten days. Finally, the ruble gained ground for a third day amid speculation that Russia’s Prime Minister ordered companies to sell foreign exchange received from exports.

The U.K. FTSE 100 Index was up 0.3%, Germany’s DAX Index was 0.6% higher, France’s CAC-40 Index advanced 1.4%, Spain’s IBEX 35 Index traded 0.7% to the upside, Italy’s FTSE MIB Index gained 1.5%, while Switzerland’s Swiss Market Index ticked 0.1% lower, Greece’s ASE Athens Index tumbled 1.7% and the dollar-denominated Russian Micex Index was down 2.7%.

Stocks in Asia finished lower, with Chinese equities falling the most in two weeks, as worries surfaced that the recent gains across the board may be a bit too hot amid concerns of global growth. China’s Shanghai Composite Index tumbled amidst weakness in banking and materials stocks, while the Hong Kong Hang Seng Index snapped a four-day winning streak. Japan’s Nikkei 225 Index inched higher, with weakness in the yen helping some strength in export-related stocks mitigate some of the softness in energy issues. Iron ore prices tumbled to their lowest level since 2009, pressuring stocks in Australia. India’s S&P BSE Sensex 30 Index finished lower, despite an early advance after results showed the Prime Minister Modi’s party won the greatest number of seats following two state elections.

Consumer Spending Powers GDP to 5.0% Rate

The U.S. economy accelerated to its highest pace of growth in the past 11 years during the third quarter, an unexpectedly strong revision as consumer spending was stronger than first estimated.

Gross domestic product (GDP) — the value of all goods and services produced by the U.S. — grew at a real 5.0% annual rate in the third quarter, the Commerce Department said Tuesday. That’s up from a prior reading of 3.9% and an initial estimate of 3.5%.

This is the fastest pace of growth since the third quarter of 2003. Economists had expected Q3 GDP to be revised up to a 4.4% rate.

At the open, the Dow Jones Industrials Average (DJIA), crossed 18,000 for the first time. The even faster pace of growth stemmed from stronger consumer spending and business investment. Inventory investment was also revised higher.

Consumer spending was revised up to 3.2% from 2.2%, led by purchases of durable goods. Spending on business fixed investment was revised to 7.7% from 5.1%.

Spending on structures such as plants and office buildings was revised up to 4.8% from 1.1%, while spending on equipment was raised to 11.0% from 10.7%.

The gain in business inventories was revised to $82.2 from $79.1 billion, a high level that could induce companies to scale back a little in the fourth quarter and perhaps impinge on growth.

Economists predict the economy is likely to expand at a 2.5% pace in the October-to-December period. However, many feel with lower gas and oil prices that number could be considerably higher.

In a sign of momentum already ebbing, U.S. durable goods orders unexpectedly fell in November, down 0.7%, the third decline in the past four months.

Inflation as measured by the PCE index slipped to at a 1.2% annual rate.