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.

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