Market Perspective for December 30, 2016

The Nasdaq eked out a new all-time high on Tuesday, despite the abbreviated trading week. For the year, the Nasdaq and S&P 500 gained more than 10 percent, the Dow rose almost 14 percent, and the Russell 2000 advanced 24 percent. The strong post-election rally contributed substantially to 2016 gains.  U.S. markets were quiet as investors rebalanced portfolios and made year-end tax sales, and most sectors were marginally lower on the week. The SPDR S&P 500 ETF (SPY) was lower by less than 1 percent, though analysts believe the consolidation may be a pause before higher volume resumes after the first of the year. Domestic markets will be closed Jan. 2 in observance of New Year’s Day.

The S&P/Case-Shiller House Price Index met consensus estimates on Tuesday. As expected, the National Composite 20 Index showed a 5.1-percent year-over-year increase. Pending Home Sales fell to 2.5 percent, well below the forecast 0.5-percent gain. Mortgage applications, however, increased 4 percent last week as prospective buyers locked in favorable rates. Thursday’s weekly initial unemployment claims figure met forecast estimates with a seasonally-adjusted figure of 265,000. It was the 95th straight week that claims were below the threshold of 300,000 that is associated with full employment.

Oil inventory increased, despite predictions for a drop of a half-million barrels. West Texas Intermediate crude rose slightly more than 1 percent on the week. The benchmark has added approximately $8 per barrel since the end of November. Traders are anticipating the impact of OPEC production cuts that are slated to begin next month and increase in the number of domestic oilrigs coming back online.  Shares of the Energy Select Sector SPDR ETF (XLE) were lower by 1 percent. The U.S. trade deficit widened in October.

Interim Italian Prime Minister Paolo Gentiloni said that it would take longer and several billion dollars more than expected to recapitalize Banca Monte dei Paschi. The government pledged its commitment to supporting the country’s banking system as necessary earlier in the month. While the iShares MSCI EAFE (EFA) ETF price remained relatively unchanged, shares of the MSCI Emerging Markets ETF (EEM) rose almost 3 percent.

Financials, industrials, and energy topped 2016 sector performance. President-elect Donald Trump’s victory in November brought a wave of economic optimism that has pushed major indexes to all-time highs. December’s interest rate hike, GDP growth, inflation expectations, and labor market stability all bode well for investors in 2017. Corporate tax reform and broad tax cuts will also spur growth in the new year.

Consumer confidence is at its highest level in nearly a decade. Financials stand to greatly benefit from deregulation. Smaller banks may become especially attractive as takeover or merger opportunities emerge. Trump’s core economic policy, in addition to tax and regulatory reforms, focuses on trade and domestic production. The SPDR ETFs covering financials and industrials, XLF and XLI, increased 17 and 8 percent, respectively since election day. Both funds have gained more than 20 percent in 2016.

ETF & Mutual Fund Watchlist for December 28, 2016

The Santa Claus Rally could carry the Dow Jones Industrial Average past the psychologically vital 20,000 level this week. The Dow has traded within 1 percent of 20,000 for three weeks, but has yet to cross the line even intraday as short-term traders bet on a pullback.

Major domestic indexes performed well in 2016, as reflected in the charts below. Small-caps broke to the upside following the election, while the Dow pulled away as value edged out growth. The next chart reflects value’s breakout, as measured by SPDR S&P 500 Value (SPYV) and Growth (SPYG).






Bonds

Interest rates heavily impacted bond markets in 2016. Short-term rates climbed steadily in 2017, albeit very slowly until July. This coincided with a drop in long-term bond yields that ended shortly after the Brexit vote. Long-term interest rates bottomed in July and short-term rates began an accelerated rally that remains in effect. Long-term interest rates have since fully reversed and ended the year higher than they began.

The steady rise in interest rates staged the perfect environment for floating-rate funds such as Fidelity Floating Rate High Income (FFRHX), PowerShares Senior Loan Portfolio (BKLN) and RidgeWorth Seix Floating Rate High Income (SAMBX). Funds with high-yield bond exposure also performed well after oil prices bottomed and credit fears subsided. Thompson Bond (THOPX) was one of the better performers in this space.

Corporate and investment-grade bond funds also finished the year higher, although the rise in rates eventually caught up with corporate bonds. Long-term Treasury bonds fared poorly. iShares 20+ Year Treasury ETF (TLT) was flat on the year, but shares fell nearly 17 percent from their July peak.










Energy

Oil prices will finish 2016 almost 50 percent higher and natural gas prices are 60 percent above year-ago levels.




WisdomTree US Dollar Bullish (USDU)
PowerShares DB US Dollar Bullish (UUP)

The U.S. Dollar Index rallied 25 percent from July 2014 to March 2015, and consolidated those gains over the next 20 months. This range ended abruptly following the presidential election. The U.S. Dollar Index broke above 100 and will end the year at 14-year highs.



iShares Semiconductors (SOXX)
Fidelity Select Semiconductors (FSELX)
VanEck Coal (KOL)
VanEck Steel (SLX)
SPDR S&P Regional Banking (KRE)

Semiconductors steadily rose throughout the year, despite technology sector underperformance.

Coal and steel also had superb years. KOL and SLX gained more than 100 percent from their lows in 2016 and finished the year as two of the strongest subsectors in the market. The rally for much of the year was a rebound from a horrible 2015, but after the election, the funds found new life as investors factored in shifting political winds.

Regional banks also enjoyed an impressive post-election rally as shares jumped more than 25 percent. In addition to the prospect of higher economic growth and higher interest rates, the Trump Administration and GOP Congress will likely roll back financial regulations, making it easier for banks to acquire competitors.

Energy led S&P 500 sector performance in 2016, followed by financials and industrials. SPDR Utilities (XLU) gained almost 25 percent in the first half of the year as the 10-year Treasury yield fell from 2.3 percent to 1.4 percent. XLU only gave back about 7 percent in the second half, despite the 10-year Treasury yield’s rally from 1.4 percent to 2.5 percent.







Market Perspective for December 27, 2016

The 2016 Santa Claus Rally sent U.S. equities higher amid low volume trading and markets should remain quiet through the week as various countries close for the New Year. U.S. markets will be open from Tuesday through Friday.

The Dow Jones Industrial Average has traded within 1 percent of 20,000, a key psychological level, since December 12. Once the Dow breaks out, short-term bears will likely close out trades and many investors will return from the sidelines with renewed confidence.

The S&P 500 Index has risen 5.7 percent and the Dow has climbed nearly 9 percent. Individual sectors have recorded even higher returns; banks have risen 25 percent.  The U.S. dollar continues to rise as well, fueled by investors’ belief in Trump’s proposed economic policies. Consumer sentiment is at its highest level since 2004 and the economy is growing at its fastest pace in two years.

Economic news will be very light this week. The S&P/Case-Shiller House Price Index hit a new all-time high in October. The Pending Home Sales Index for November will be available on Wednesday. Analysts expect a 0.5-percent increase.

Weekly initial unemployment claims will be out on Thursday and oil inventory data will be released on Friday (a day late due to the holiday). Unemployment claims are expected to drop to 270,000 from last week’s 275,000. Analysts expect U.S. crude inventories to drop by approximately 0.5 million barrels following last week’s larger-than-expected build. After quickly rising to more than $50 per barrel, crude prices have stabilized in the low $50s as inventories increase and new production comes online. On Friday, analysts predict the December Chicago Purchasing Managers’ Index (PMI) will fall from 57.6 to 52.3 No major companies are set to report earnings this week.

With the final trading week of the year, investors are running out of time to settle 2016 business. Contributions to individual retirement accounts can be made until April 15, but 401k contributions for this year must be made in 2016. Capital losses must be sold this week to claim on 2016 tax returns. Retired investors must also take required minimum distributions from retirement accounts by the end of this week to avoid tax penalties. If you have yet to manage these transactions and require assistance from your broker or fund company, it would be prudent to take care of it early. Call volumes will be heavy all week and will increase as the Friday deadline approaches.

If you have any questions pertaining to your contributions or investments you are considering selling, please call us at (888) 252-5372.

Market Perspective for December 23, 2016

Major indexes maintained new all-time highs hit early in the week, despite minor selling pressure, to finish the week marginally higher.  Recent polls show investors believe any negative impact from the recent hike in interest rates by the Federal Reserve will be short-lived, suggesting the bull rally could have legs well into 2017. Increasing wages, labor market strength, and overall economic expansion were confirmed by the Bureau of Economic Analysis’s third-quarter GDP growth revision to 3.5 percent from the prior 3.2 percent.

The Bank of Japan (BoJ) reported increased activity and kept its benchmark interest rate unchanged this week, as expected, leaving the yen near 11-month lows. The Nikkei, however, hit a new 52-week high. The U.S. Dollar Index pushed to a new 14-year high during the week against a weaker euro. The Canadian dollar fell on Friday following reports of economic contraction in October.  After the euro, yen and British pound, the Canadian dollar is the fourth largest component of the U.S. Dollar Index.

November existing home sales were unexpectedly strong at 5.61 million, close to a 10-year high and the third consecutive month of rising sales. The consensus estimate called for sales to drop in the face of rising mortgage rates, but buyers are still moving off the sidelines, spurred by rate increases. New homes sales hit 592,000, also beating expectations. The weekly oil inventory report showed a larger-than-expected increase. Libya also indicated that it might increase production over the next few months. West Texas Intermediate Crude, however, remained unchanged on the week.

Weekly unemployment claims reach a six-month high of 275,000, but any number below 300,000 signals a strong labor market. The Personal Income and Outlay reports showed a slight decline in November wages and slower-than-expected consumer spending growth. Durable goods orders were stronger than anticipated, down 4.6 percent from last year.

On Monday, homebuilder Lennar (LEN) reported an 11-percent jump in sales. Although the company beat forecast estimates, shares fell on the week. Nike (NKE) earnings also beat consensus forecasts and eased some concerns about a slowdown in the face of increased competition, pushing shares higher. FedEx (FDX) shares fell 4 percent following a mixed earnings report. While FedEx beat its revenue forecast, the company missed earnings estimates. On Wednesday, shares of Micron Technology (MU) jumped more than 13 percent following EPS and revenues that handily beat expectations.

For the third consecutive quarter, Bed, Bath & Beyond (BBBY) reported disappointing EPS and revenue numbers. Shares plunged more than 10 percent on the news. Although shares of Rite Aid (RAD) slipped following a weak earnings report, the stock finished higher for the week after the firm announced Fred’s would purchase 865 stores. Selling the stores will also help Rite Aid gain regulatory approval for its acquisition by Walgreens (WBA).