Year End Volatility For Equities – Global Equity Market Overview

Major U.S. equity indices stabilized in November as markets reassessed October’s pullback. The Dow Jones Industrial and S&P 500 indices made up of larger cap stocks rebounded over 1.5% in November, outpacing the tech heavy Nasdaq index for the month. 

Emerging market equities rebounded in November as the dollar’s rise slowed and investors found value in various developing economies. Ongoing tariff and trade tensions have been hampering capital investment and trading arrangements for companies in the emerging markets. Many hope that U.S. companies will use excess cash for capital investment rather than for stock buybacks, which has been a primary use of cash for many domestic companies.

Some analysts expect that the Fed’s perceived slow down in rising rates, along with the trade and tariff arrangements that occurred as a result of the G20, may prove positive and supportive for the markets following weeks of rampant volatility. Some companies have been holding back on hiring and capital expenditures until a resolution is finally achieved on trade. (Sources: S&P, Dow Jones, FRED, Bloomberg)

Rates Fall In November – Fixed Income Update

The recent trend in rising rates slowed in November as expectations intensified that the Fed may not raise as ambitiously in 2019 as initially projected. The yield on the 10-year Treasury bond fell from 3.24% at the beginning of the month to 3.01% at month’s end. The drop in rates may be interpreted by equity markets as either positive or negative.

Federal Reserve officials acknowledged the adoption of a more flexible process in gradually increasing rates in 2019, where a neutral rate is targeted. The so-called neutral stance taken by the Fed causes uncertainty as to how the Fed perceives the direction of economic growth, as the neutral rate generates monetary policy that is neither stimulative nor restrictive. Many believe that the impact of the Fed’s rate hikes this year have not yet fully materialized, thus creating a neutral stance for the Fed to allow it time to decide. (Sources: U.S. Treasury Dept., Federal Reserve, U.S. Treasury)

Oil Prices Take A Large Drop – Commodities Update

Global oil prices declined sharply in November, with the domestic benchmark (WTI) falling 22% for the month, the single largest monthly drop in 10 years. The steep drop in price is a result of increased production by U.S. producers as well as Saudi Arabia, Russia, and OPEC. The recent price decline is of grave concern to OPEC, Russia, and Saudi Arabia, whose breakeven cost for oil production is estimated to be higher than U.S. production. The rapid expansion of supply in the U.S. has resulted in large amounts of unrefined oil in storage, which must then reach refineries for the final transformation into gasoline. Construction of new pipelines and transportation infrastructure in the U.S. will facilitate the shipment of crude oil much more rapidly and efficiently over the next few years. The United States is currently exporting more oil than it is importing, which helps insulate the country from global price swings and adds leverage for U.S. producers competing with foreign producers. U.S. exports of crude oil and petroleum products have more than doubled since 2010 according to the Department of Energy. (Sources: Department of Energy, IEA)

Used Car Sales Are Heading Higher – Consumer Behavior

Over the past few months, the demand for used automobiles has been rising with the difference in prices between new autos and used autos the largest it has been in years. Consequently, as the demand for used cars has increased, so have used car prices, as tracked by the Federal Reserve Bank of St. Louis. Even with the recent price gains, used automobiles are still less expensive than a comparable new automobile.

With nearly 40 million used cars sold last year, the used car market is now twice as large as the new car market. Dealers are finding higher margins on used cars versus new cars, transitioning sales and marketing efforts from new car sales to used car sales. As auto manufacturers ramped up lease incentives 2-5 years ago, those same cars are now coming back to dealerships and resold as used vehicles. Buyers are finding better values in used cars, most of which are well maintained lease returns with low mileage. Various factors are contributing an increase to new car prices, including rising loans rates, tariff concerns, and minimal sales incentives. The rise in used car prices, on the other hand, is simply a result of an increasing demand for limited supply.

New car prices have steadily risen as manufacturers supplied vehicles with advanced technology and expensive options. A 2-5 year old used car with low miles will have depreciated in price relative to paying full price for a new vehicle with similar features. (Sources: FRED; Federal Reserve Bank of St. Louis)

Insurance Losses By State Are Adding Up – Insurance Sector Review

As natural disasters mount from wild fires in California to hurricanes and flooding in Texas, Florida and the East coast, insurance claims are in the billions of dollars and growing. Most major insurance companies offer and issue various types of insurance, including liability, fire, flood, earthquake and homeowners. As claims increase with one or two of the coverage segments, coverage costs may increase with the others as well. Insurance companies are intertwined and coverage costs are related. Some insurance companies spread their costs across all policyholders nationwide as opposed to centralizing higher premiums to one geographic region. Homeowners in coastal states from Texas and Florida to North Carolina are seeing rates rise faster than in other parts of the country, as the threat of future storms and flooding remains relatively high. In California, some insurance companies have designated several additional regions as high risk areas to insure. (Sources: NAIC, Insurance Information Institute)