Market Update: Wednesday, November 16, 2016

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  • Markets slip as dollar breaks out to 14-year high. Equities are trading lower this morning, as bond yields resume their rise and the dollar index climbs to its highest level since 2003. The S&P 500 posted a 0.8% gain in yesterday’s session as the technology sector (+1.7%) bounced back, while energy stocks (+2.7%) received a boost from a nearly 6% jump in the price of crude; WTI crude oil ($45.45/barrel) is trading lower this morning ahead of the U.S. Department of Energy’s stockpile data. Asian markets finished mixed overnight, with the Nikkei (+1.1%) leading the way higher amid a weakening yen, while the Shanghai Composite and Hang Seng both moved slightly lower. European markets are down near 1% in afternoon trading on little economic news. Finally, the yield on the 10-year Treasury is up to 2.25%, and COMEX gold is slightly higher to $1,227/oz.

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  • Biggest beneficiary of Trump’s victory so far? Financials. Higher interest rates with a steeper yield curve, deregulation optimism, and prospects for more lending have powered the financials sector to a 10.9% return in the week since Election Day, more than five times the S&P 500’s return during that time. The still uncertain path under a Trump presidency suggests the group may need a breather, but no other sector has seen its prospects brighten more during the past week than financials; healthcare gets honorable mention. For more on our sector views, please see our November Portfolio Compass, due out later today.
  • Another big post-election winner? Small caps. The Russell 2000 has gained 9.1% since Election Day, compared with 2.1% for its large cap counterpart Russell 1000. The strength reflects optimism surrounding increased U.S. production, credit expansion, and strong cyclical gains (small cap index has a more cyclical sector mix). Small caps are relatively less sensitive to U.S. trade policies than large caps. However, smaller companies would benefit less should companies be allowed to repatriate overseas cash in 2017 at a discounted tax rate as we currently expect, and the mid-to-late stage of the business cycle when volatility rises tends to be better for large caps. So while the near-term outlook has undoubtedly improved, we would suggest tempering optimism over the intermediate term.
  • More strength under the surface? The S&P 500 gained 0.7% after consolidating the past three days. Although it didn’t make a new high, it is worth noting that the S&P 500 Equal Weight Index did. Remember, the S&P 500 is cap weighted, and large caps haven’t done as well since the election as smaller names have. Giving all securities an equal weighting is another way to measure market breadth, and new highs in the equal weight index is a good sign. The Russell 2000 Index (small caps) and the S&P 400 Mid Cap Index also both made new all-time highs. This is a positive sign, as it suggests many names are participating in the recent equity rally.
  • A major equity warning sign? The recent market action is being labeled by some as worrisome and the reason is many issues are making new 52-week highs, while many others are making new 52-week lows. Historically, this type of confused action is seen ahead of large equity selloffs. On Monday, November 14, more than 300 issues on the NYSE made new 52-week highs, while more than 300 also made new 52-week lows. This had never happened before. Today on the LPL Research blog we will take a closer look at these concerns and show why they might not be such a major worry this time.

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Wednesday

Thursday

  • Housing Starts and Building Permits (Oct)
  • Yellen (Dove)
  • Mexico: Central Bank Meeting (Rate hike expected)
  • China: Property Prices (Oct)

Friday

  • Leading Indicators (Oct)
  • George (Hawk)
  • ECB’s Draghio speaks in Frankfurt
  • APEC Leaders Summit in Peru

Click Here for our detailed Weekly Economic Calendar

Important Disclosures

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

A money market investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money markets have traditionally sought to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better.

Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.

Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.

High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.

Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.

Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.

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