- Market dips as oil tops $50. U.S. stocks are slightly down in early trading–following news that jobless claims increased to their highest level since June, and as WTI crude oil continues its run from yesterday, moving above $51/barrel. The S&P 500 lost 0.3% in Wednesday’s session; the final day of a strong November that saw the Organization of Petroleum Exporting Countries (OPEC) come to an agreement to cut oil production, sending the spot price of crude up more than 9% and the energy sector up 4.8%. Technology stocks fell as the Nasdaq dropped 1%, while rate-sensitive sectors were hurt by an 8 basis point jump in the 10-year Treasury yield. Asian markets are mostly higher following a number of Purchasing Managers’ Index (PMI) reports that came in better than expected, while European markets are moving lower following a swatch of economic data that included Eurozone unemployment, country-specific PMI, and Italy’s gross domestic product (GDP). Elsewhere, Treasuries are continuing to slip, with the yield on the 10-year note up to 2.46%; COMEX gold is also falling 0.8% to $1,165/oz.
- OPEC delivers the bare minimum. The oil market, and oil companies, reacted very positively to the OPEC announcement of a 1.2 million barrel per day production cut. But looking into the details, this looks like the absolute bare bones agreement for many reasons. By its own terms, this agreement only lasts for six months. The deal exempts Libya, Nigeria, and Iran from production cuts, leaving Saudi Arabia to take a 500,000 barrel/day cut. Furthermore, there is an additional 600,000 barrel/day cut promised from non-OPEC sources. This includes Russia, agreeing to cut 300,000 barrels/day of production, but only “as technical abilities allow.” Do they need a technology breakthrough to not pump oil? This deal is good for U.S. oil producers, particularly those in low-cost areas.
- Stock market outlook (as of 12/1/16). We expect stocks to at least maintain 2016 year-to-date gains through year end and, as stated in our Outlook 2017: Executive Summary publication, expect mid-single-digit returns for the S&P 500 in 2017 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 higher volatility as the economic cycle ages, while a policy mistake in Washington, D.C. that causes recession remains the primary risk to our forecast.
- Bond market outlook (as of 12/1/16). We expect the bond market to hold year-to-date gains in December and produce low-to-mid single digit gains in 2017 (based on the Barclays Aggregate Bond Index). An uptick in inflation, along with steady and improving economic growth due to anticipated fiscal stimulus, and potential Federal Reserve Bank (Fed) rate hikes, may possibly pressure bond prices in 2017. Although our baseline forecast is for 10-year Treasury yields to end 2017 between 2.0% and 2.5%, we see the potential for yields to climb as high as 2.75% should meaningful fiscal stimulus be enacted.
- Claims tick up, but still suggest tight labor market. First-time claims for unemployment insurance moved higher in the latest week, but at 268,000 in the week ending November 26, claims remained near 40-year-plus lows. The timing of Thanksgiving likely impacted the claims data in the past week and may impact data again next week. Over the past 26 weeks, claims have not moved at all. In the past, claims have to increase by more than 75,000 over a 26-week period to indicate that a recession is at hand.
- The latest Beige Book suggested that the U.S. economy is reaccelerating, pushing up wages and inflation, but that election-related uncertainty is elevated and keeps the Federal Reserve (Fed) on track to tighten later this month. The Fed released its Beige Book ahead of the December 13-14, 2016 Federal Open Market Committee (FOMC) meeting. Our Beige Book Barometer (strong words minus weak words) rose to +64, the highest since April 2016, after the +41 reading in October. The word “election” was used 11 times in the latest Beige Book, up from eight in October. By comparison, “election” was used five times in the November 2012 Beige Book and not at all in the November 2008 Beige Book.
- Wrapping up November. The S&P 500 gained 3.4%, for the second-best monthly gain of the year and best November since 2009. Financials were the top-performing sector, up 14%. Meanwhile, small caps had a huge month as well, as the Russell 2000 (RUT) gained 11.0% for the best month since October 2011. As good as November was for equities, it was that bad for bonds, as the Barclays Global Aggregate Total Return Index was down 4% for the worst month on record going back to 1990. The 10-year U.S. note rose 56 basis points, for the largest monthly jump since 2009.
- Welcome to December. Since 1950, no month sports a better average return than December (+1.6%) . It is also higher 76% of the time, again the best out of all 12 months. When the S&P 500 has been up year to date heading into December, the average returns for December have jumped to 2.0%. Last, December has been lower each of the past two years, and the S&P 500 has never been down three straight years. Today on the LPL Research blog, we will take a closer look into what has happened historically in December.
 We expect the 10-year Treasury yield to end 2017 in its current range of 2.0 – 2.5%, with a potential for 2.75%. 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.
 Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.
ISM Mfg. (Nov)
Vehicle Sales (Nov)
Employment Report (Nov)