The nation’s economy keeps chugging along despite worries of the monkey-wrench October’s partial government shutdown threw into the works. So far, analysts expect employment to take the biggest hit from the shutdown, and this Friday we will receive the delayed, but official, October employment report. Unaffected by government delays, ADP released its private sector employment report on schedule last week. Unfortunately, the 130,000 new jobs reported fell short of expectations. ADP noted that this is essentially the “break-even” rate, and any further weakening would translate into rising unemployment.
As hinted above, other areas of the economy seem to have taken the shutdown in stride, although some economic reports are still reflecting September data. The Conference Board published its economic indexes today, and they are an example of the “new” still being based on September data. Therefore, you should view the 0.7% increase in the Leading Economic Index and the 0.2% gain in the Coincident Economic Index cautiously.
Manufacturing is an area of strength. The ISM Manufacturing Index actually rose 0.2 points in October. Levels above 50 indicate expanding activity, and it now sits at 56.4, its highest level since April 2011. Analysts expecting a drop to 55.0 were caught off guard and are now thinking they may need to revise their GDP forecasts upward.
The ISM Non-Manufacturing Index also rose in October, increasing 1.0 point to 55.4. Here too, analysts were expecting a decline and were pleasantly surprised by the robust results. There is always a chance of a delayed impact to the data, but for now, it seems as though any economic slowdown caused by the government shutdown will be small and fleeting.
Consumers appear to be less confident than companies are. The Discover Spending Monitor for October dropped to its lowest level since December 2011. Respondents indicated they would reduce discretionary spending plans in November. This is not good news for retailers as the all-important holiday shopping season is about to get underway. Consumer confidence can change before Black Friday arrives, but in the meantime, retailers need to prepare for a tricky inventory management environment.
Industrials continues to top the rankings thanks to sustained improvements in domestic manufacturing activity. Consumer Discretionary climbed another spot to land in second this week. Telecom was unable to hold its recent gains and slipped to third while Technology improved to fourth. There is a near four-way tie in the middle of the pack with Materials, Consumer Staples, Health Care, and Energy bunched together. There was compression among this group a week ago and even more so today. Time will likely alleviate this situation, making differences between these categories more meaningful. Utilities posted a good week and climbed two places out of the basement. Financials took a hit and dropped to tenth while Real Estate had a terrible week and now sits in last place.
The Style rankings are topsy-turvy this week, indicating a change in market leadership is potentially underway. For most of the past eight months, relative strength has been aligned with inverse market capitalization. In other words, Small and Micro Cap stocks have led while Large and Mega Cap stocks lagged. Today, we have Large Cap categories at each extreme with Large Cap Growth at the helm and Large Cap Value on the bottom. There is compression in the momentum scores across the entire spectrum, and only eight points are separating the strongest from the weakest. We already mentioned the anomaly of two Large Cap categories defining the upper and lower bounds, and now we add to that list by noting the two extreme capitalization categories of Mega Cap and Micro Cap stocks are next to each other in the middle of the pack.
Europe still leads the Global rankings, although its margin is fading. Weakness in the Euro this past week appears to be the largest contributor to Europe’s loss of momentum. If Euro weakness turns out to be temporary, then we would expect Europe’s reign to continue. Last week’s two-way tie for second place between EAFE and the UK has become a three-way tie with different constituents. The UK remained in the hunt and is now joined by Pacific ex-Japan and the US. The latter moved up from sixth place in the process. EAFE fell four places to sixth, primarily due to weakness in Japan. Japan’s drop was the result of unfavorable currency translations, but it was enough to drop the country to the bottom of the rankings. Emerging Markets and Latin America lost strength while China improved enough to escape from last place.
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