Market Update: Wednesday, November 23, 2016

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  • Markets tread water ahead of Thanksgiving holiday. U.S. markets are near flat after the Dow, Nasdaq, and S&P 500 climbed to record highs yesterday; the Dow closed above 19,000 for the first time ever. The S&P overcame a 1.4% decline in the heavily-weighted healthcare sector with large gains in telecom (+2.1%) and consumer discretionary (+1.2%). In Asia, Japan’s Nikkei was closed for a holiday, while the Shanghai Composite dipped 0.2% and the Hang Seng closed flat. Despite better-than-expected Eurozone PMI, European markets are lower across the board, though many of the declines are modest. Elsewhere, WTI crude oil ($47.67/barrel) is off 0.8%, COMEX gold ($1186/oz.) is below $1200/oz. for the first time since February, and Treasuries are falling as the yield on the 10-year note has reached 2.40%.

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  • 2017 Economic and Fed Outlook. The economic recovery that began in mid-2009 may pass its eighth birthday in 2017, as the odds of a recession-based on leading economic data-remain low. However, the risk of a recession due to a policy mistake (e.g., monetary, fiscal, trade, immigration) has increased heading into 2017. President-elect Donald Trump and Congress will likely enact pro-growth policies in the first half of 2017, including corporate and personal tax cuts, deregulation, and increased spending on infrastructure and defense. Although gains in the labor market will likely continue to moderate in 2017, job growth remains robust enough to suggest two Federal Reserve Bank (Fed) rate hikes. Inflation, which has been dormant due to falling commodity prices in recent years, may make a comeback in 2017, as above-potential gross domestic product (GDP) growth and a tightening labor market push up wages and ultimately inflation.
  • We expect mid-single-digit returns for the S&P 500 in 2017 and the continuation of the nearly eight-year-old bull market, consistent with historical mid-to-late economic cycle performance. We expect S&P 500 gains to be driven by: 1) a pickup in U.S. economic growth partially due to fiscal stimulus; 2) mid-to-high single-digit earnings gains as corporate America emerges from its year-long earnings recession; 3) an expansion in bank lending; and 4) a stable price-to-earnings ratio (PE) of 18 – 19. Gains will likely come with increased volatility as the economic cycle ages. The primary risk to our forecast is a policy mistake in Washington, D.C. that causes a recession.
  • Low-to-mid-single-digit returns expected for fixed income. Increasing growth and inflation expectations, along with the potential for Fed rate hikes, will put upward pressure on rates, but this is likely to be largely offset by low and negative rates overseas. We expect the 10-year Treasury yield to end the year between 2% and 2.5%, with a potential move as high as 2.75% if meaningful fiscal stimulus is enacted. Scenario analysis based on this potential interest rate range and the duration of the index indicates low-to-mid single digit returns for the Barclays Aggregate Bond Index.
  • Dow 19,000. The Dow Jones Industrial Average closed above 19,000 for the first time ever yesterday. These milestone levels always bring with them a good deal of media attention and excitement. What is worthwhile about this 1,000 point interval is it took nearly two years to go from 18,000 to 19,000. This hammers home just how range bound equities have been.
  • Small caps up a lucky 13. Various indexes again closed at new highs yesterday, with the Russell 2000 up an amazing 13 days in a row. That is the longest win streak since 15 in a row in 2003. The index has also made a new all-time high seven days in a row, the longest streak since 2013.
  • October durable goods report suggests modest upswing in manufacturing-related capital spending is underway. Posting a +0.4% month-over-month increase in October, orders for non-defense capital goods excluding aircraft exceeded expectations (+0.3%) and accelerated from September’s 1.4% drop. This reading suggests that business capital spending has some momentum as 2016 ends. Shipments for non-defense capital goods excluding aircraft, which feed directly into GDP as business capital spending, rose 0.2% in October versus September, causing shipments in October (the first month of Q4 2016) to run 2% ahead of Q3’s average. Today’s durable goods data keep the Fed on track to tighten in December and the economy on track to post growth of between 3 and 3.5% in Q4 2016.
  • Drug trial failure to weigh on healthcare sector today. The healthcare sector is being dragged down this morning, following the failed drug trial of a major pharmaceutical company. Although we continue to like the sector not only on valuation, but also for its growth prospects and the benign regulatory outlook, we acknowledge that the pace of innovation has slowed and the sector will likely have a bumpier path to recapture 2016 underperformance.
  • Busy post-Thanksgiving week ahead (November 28-December 4, 2016). As markets digest the first big weekend of holiday shopping, events here and abroad will also be top of mind. Early in the week, the OECD’s economic forecast for 2017 along with a speech from European Central Bank President Draghi will draw most of the attention, but my mid week, the outcome of the OPEC meeting and the Fed’s Beige Book are likely to take center stage. Later in the week, data on November ISM, vehicle sales and the November jobs report will be in focus. On Sunday, December 4, Italy will hold a referendum on constitutional reform, and the outcome of that vote is likely to have implications well into 2017.
  • MarCom 2016 Awards. LPL Research is honored to announce our inclusion in the Association of Marketing & Communication Professionals’ MarCom 2016 awards: 2 platinum, 3 gold, and 3 honorable mentions. These awards are for a range of flagship communications, including the Midyear Outlook 2016: A Vote of Confidence, the LPL Research blog, the House of Charts, and the Recession Watch Dashboard.

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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.

Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

Technical Analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results. Technical Analysis should be used in conjunction with Fundamental Analysis within the decision making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs are examples.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

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