Market Update: Thursday, December 1, 2016

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  • 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.

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  • 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[1] (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[2], 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.

 

[1] 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.

[2] 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.

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Thursday

ISM Mfg. (Nov)

Vehicle Sales (Nov)

Mester (Hawk)

Friday

Employment Report (Nov)

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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.

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