- 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%.
- 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.
- Durable Goods Orders and Shipments (Oct)
- Markit Mfg. PMI (Nov)
- FOMC Minutes
- Eurozone: Markit Mfg. PMI (Nov)
- Japan: Nikkei Mfg. PMI (Nov)
- Germany: Ifo
- Advance Report on Goods Trade Balance (Oct)