Who Says You Can’t Go Home?


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Ralph-00338_cmykby Ralph Cole, CFA
Executive Vice President of Research

Homeward Bound

Thanksgiving is the busiest travel time of the year. Families are crisscrossing the country returning to their childhood homes to celebrate the holiday. And one thing we should all be thankful for is a healthy housing market.

Earlier this week it was reported that the S&P 500/Case-Shiller Home Price index rose 5.5 percent from the prior year. Home prices remain 20 percent below levels reached in 2006 on average, but what is more important than the home price level is the change from one cycle to the next. From 2000 through 2006, home prices doubled at an unsustainable pace and we all paid the price. The current cycle is much more measured and thus, much more durable in our mind.

Chart 1

Home Is What You Make It

Prices are just one part of the overall housing equation. Below you can see housing starts for the past 30 years. Housing starts in the U.S. are just now barely above levels reached at the bottom of the last housing cycle in 1990. The first few years after the housing crash we experienced low rates of construction before it finally started to accelerate in late 2011.

Housing Units Started, Total

The Incredible Journey

A continued rise in housing starts is needed to offset continued strong demand for new homes. If supply were too low, we would expect home prices to accelerate at a faster pace, making them less affordable. To this point, the market seems to be in balance.

Takeaways for the week

  • The housing market is on much sounder footing this time around
  • Have a safe and healthy Thanksgiving Holiday


Back in Business Again


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Jason-00011_cmykby Jason Norris, CFA
Executive Vice President of Research


Back in Business Again

It has been a volatile year for equities and as we head into the holiday season, that doesn’t look to dissipate. After the 12 percent sell-off investors went through over the past few months (Fed rate hike concerns, China market crash, Greek debt issues and the constant geo-political flare-ups), the S&P 500 has rallied back, culminating with its best week of the year. While 2014 proved to be a narrow market, 2015 is even more so. When you look at the 10 largest U.S. companies (see table below), you notice the majority of them, have enjoyed significantly greater returns than the 3 percent for the S&P 500.

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Source: FactSet data through Nov 20, 2015

What is even more dramatic is that three stocks were responsible for all of this return: Amazon, Alphabet/Google and Facebook.

There have been prior periods of large cap driven markets, coupled with a handful of names driving that performance. But what we have experienced this year is less than a handful of mega cap names delivering all the index returns.

One thing to note on this narrow focus is the emphasis on “growth.” The sell-off we experienced this summer was a classic “growth” scare. Investors believed that due to the strong dollar and the slowdown in China would cause global economic growth to slow. While we’ve seen some stabilization in the equity market, there is still concern over global economic growth. As such, investors have been willing to “pay up” for growth companies and avoid cheaper names that are tied to the face of economic growth. For instance, the three stocks mentioned earlier trade at substantial premiums to the overall market.

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Source: FactSet data through Nov 20, 2015

Investors are paying a lot more for a  dollar of earnings for a select few names due to the concern over growth. This has resulted in growth stocks returning roughly 7 percent this year, while value stocks are down 2 percent.

Takeaways for the Week:

  • Different “styles” can come in and out of favor, the key is to remain focused on the long term and not chase short-term performance
  • As the global economy improves, value stocks should regain some leadership in 2016

Our Takeaways for the Week


Light at the End of the Tunnel


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Shawn-00397_cmykby Shawn Narancich, CFA
Executive Vice President of Research

Retailing Blues

Earnings season has all but wrapped up for another quarter, but department store retailers are adding a problematic book-end to a quarter that has generally come in ahead of expectations. Flat third quarter earnings were weighed down by widespread losses in energy and dampened again by the stronger dollar, factors that many investors thought would spare U.S. centric retailers. Following Wal-Mart’s surprisingly weak earnings outlook in October, both Macy’s and Nordstrom came to the earnings confessional this week to report weaker than expected sales and substantially reduced profit forecasts. For Macy’s, its red star seems to be falling, as elevated inventories are forecast to weigh on margins for the company’s most important holiday sales quarter. Despite recent evidence of elevated merchandise levels in traditional retail channels, the subsequent 15-20 percent declines in both retailers’ share prices speak to the traffic challenges afflicting both Nordstrom and Macy’s. Investors long retailing stocks will hope for better news from home improvement, off-price, and specialty retailers next week.

Sales Falling Flat?

Amid increasing concerns about U.S. retailing, news that October retail sales barely budged cast a further shadow on the industry. In our opinion, weakness for select retailers reporting quarterly numbers speaks more to their distribution strategies and product mix than to any deeper concerns about the health of U.S. consumers. Shoppers are buying more of what they want and need online at Amazon.com, disadvantaging traditional bricks-and-mortar retailers that lack the cars, footwear, and food that consumers still want to see and trial firsthand before they buy. Also at work are the weather and the dollar. A mild fall has hurt department store retailers’ apparel sales and the strong dollar has deterred foreign visitors from taking American shopping sprees. Notwithstanding company specific retailing challenges, we continue to believe that a healthy job market, low gas prices, and low interest rates support domestic consumption and will be a tailwind for the U.S. economy.

Oil — Down but not Out

In addition to the hit that retailers took this week, energy stocks again took it on the chin as oil prices retest August lows. Refineries are going through what’s called the turnaround season, a time of reduced product output that coincides with a change in product emphasis from summer gasoline to winter heating oil. Refinery throughput slows and with it, crude demand. As investors fret about recent US inventory builds, we would observe that seasonal factors are at play that obscure the tightening of oil markets – tightening that coincides with falling U.S. production and flattening OPEC production. We don’t expect OPEC to cut production at its December 4 ministerial meeting, but we do believe it will acknowledge that markets are coming back into balance and accede to the cartel’s current level of output. With fuel demand continuing to grow at healthy levels and global supply flattening, the slack in oil markets is disappearing. We are bullish on oil and look forward to higher prices ahead.

Our Takeaways from the Week

  • Retailers are book-ending third quarter earnings season, causing consternation for department store investors
  • Oil prices are retesting late summer lows ahead of the upcoming OPEC meeting, amid increasing evidence that supply and demand are rebalancing


A Lack of Household Formation Participation Trophies


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by Brad Houle, CFA
Executive Vice President

Millennials get a bad rap. They are characterized as the generation that was born between 1980 and 2000 and are often considered to be indulged and coddled. They are often accused of being the by-products of a society where everyone receives a participation trophy. This is quite different than the baby boomer generation, born at the end of World War II through the mid-60s and often considered wealthy, active and the result of an economic boom. And while the millennial birth rate in 1990 matched the 1957 baby boomer birth rate with greater than 4 million births, similarities between the two generations begin and end there.

Following the baby boom of the 1950s, there was a significant pick up in household formations roughly 20 years later. Consumer spending on the acquisition of homes, furniture and other durable goods define household formations, which makes up almost 70 percent of our gross domestic product or, said differently, our national income. This consumer consumption of household formation drives the economy and the millennials cannot keep up the pace. According to Federal Reserve data from 1997 to 2007, about 1.5 million households were formed on average each year in the United States. Then the Great Recession hit, and in the ensuing three years, the rate fell to 500,000 per year.

In addition, the Great Recession resulted in a drop in millennial independent living. The Pew Research Center, in the first third of 2015, found that 67 percent of millennials were living independently, compared with 69 percent of 18-to-34 year olds living apart from family in 2010 and 71 percent in 2007. Also, unemployment in the millennial demographic shot up over 12 percent during the recession. Moving back in with Mom and Dad and/or possibly pursuing further education became a viable option for many in the group.

Today we learned that current unemployment has dropped to around 5 percent. This begs the question: If unemployment has improved, why are millennials still so reluctant to leave the nest? The rising cost of tuition, the student loan debt that results and an increased home down payment are thought to be a few of the culprits of these nest-bound millennials. The College Board, responsible for several standardized college tests such as the SAT, points out that the average “published tuition and fees at public four-year colleges and universities increased by 13 percent in 2015 dollars over the five years from 2010-2011 to 2015-2016, following a 24 percent increase between 2005-2006 and 2010-2011.” As a result, according to the Brookings Institute, the average balance of outstanding student loan debt for households with some debt was $25,700. In addition, following the financial crisis the required down payment on a home was raised to 20 percent. Considering these factors, it is possible this generation is making rational economic choices by living at home as opposed to a desire to have their parents clean their room for them.

Ned Davis Research estimates that there are roughly 3 million incremental millennial households that have yet to be formed. As millennials leave the comfort of their parent’s basement, pay off their student debt and join the real world, this household formation could be a tailwind for the housing market as well as the consumer economy.

The employment report for the month of October was released on Friday and was much better than expected. 271,000 jobs were created in October and there was an upward revision to the number of jobs created in the prior month. As mentioned earlier, unemployment dropped to 5 percent and the average hourly earnings was up more than expected rising 2.5 percent on a year-over-year basis. With this stronger-than-expected data the implied probability of a Federal Reserve rate increase is now at 70 percent for the month of December.

Our Takeaways from the Week

  • Employment numbers positive
  • More anticipation of movement with the millennial generation that could be a tailwind for consumer spending