Market Update: Friday, December 2, 2016

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  • U.S. mixed on jobs report; overseas awash in red. Major U.S. indexes are mixed in early trading, following a better-than-expected jobs report, while European stocks are broadly lower ahead of Sunday’s referendum vote in Italy, tracking near three-week lows. Yesterday’s session was marked by continued underperformance of the Nasdaq (-1.4%) relative to the S&P 500 (-0.4%), as semiconductor and biotech weakness dragged down the index; financials rose 1.7% on the back of another spike in Treasury yields. Stocks in Asia fell overnight, as investors eyed upcoming U.S. rate hikes, though the Nikkei posted its fourth-straight weekly gain. Finally, Treasury yields are pulling back after Thursday’s advance; the yield on the 10-year note is back to 2.38%. Meanwhile, WTI crude oil ($51.15/barrel) is up 0.2% and COMEX gold ($1,178/oz.) is up 0.7%.

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  • Odd November jobs report, but labor market still tightening, and Fed still on track for 25 basis point hike later this month. The November jobs report was an odd mix, with a big drop in the unemployment rate (to 4.6% from 4.9%), a solid but not spectacular increase in jobs (+178,000), minor revisions to prior months’ job counts, and a disappointing deceleration in wage growth, from +2.8% year over year in October 2016 to +2.5% in November. We may be starting to see the long-awaited slowdown in job creation (200,000 per month from mid-2010 through mid-2016, to “only” +175,000 per month since August 2016), but as we have noted in several recent reports, the Federal Reserve Bank’s (Fed) view is that job growth as low as 100,000 per month may be sufficient to tighten the labor market. Our view remains that the Fed will raise rates by 25 basis points (0.25%) at the December 13-14, 2016 Federal Open Market Committee (FOMC) meeting and two more times in 2017.
  • European politics in focus over the weekend and early next week. As is typically the case in the week after the release of the monthly jobs report, next week’s U.S. economic calendar is relatively quiet, with the key releases being the service sector Institute for Supply Management (ISM) reading for November on Monday, December 5. After a flurry of Fed speakers on Monday, it’s the unofficial “quiet period” for the Fed ahead of the December 13-14, 2016 FOMC meeting. Overseas, China will begin to report its November data set next week, and the central banks of Canada, Australia, and India all meet. A busy week in Europe is ahead, with key elections in Italy and Austria on Sunday, December 4, and the European Central Bank’s policy meeting on Thursday, December 8.
  • What happens after rates rise? In this week’s Bond Market Perspectives, we looked at how rapid increases in interest rates impact bonds. But what happens after the rise? Traditionally, bonds have rallied in the year following a jump in rates. However, additional factors including the possibility for a more business-friendly environment and increased fiscal spending that could lead to stronger economic growth and higher inflation could be a headwind to increasing bond prices (and decreasing yields). We discuss this topic in more detail today on the LPL Research blog.
  • Tech sector’s post-election weakness looks like a potentially attractive opportunity. The primary reasons being cited in the financial media and by the buy- and sell-side sources we follow include: 1) fears of protectionist trade policy; 2) immigration reform that makes labor more expensive and tougher to find; and 3) relatively less impact from lower corporate tax rates. Although we are also intrigued by the opportunity emerging in healthcare following that sector’s recent weakness, we believe the technology sector may be setting up as the best near-term buy-the-dip candidate with valuations in line with the S&P 500 on a forward price-to-earnings basis. The sector’s high international exposure is clearly a risk (as it is for industrials, which have strongly outperformed since Election Day on infrastructure spending optimism). However, we continue to like the sector’s prospects for a bounce given our belief that the impact of actual trade policy is unlikely to be as onerous as campaign rhetoric suggested.
  • Early weakness in December is normal. Yesterday saw some peculiar action, as technology lost 2%, while financials gained 1.7%. In fact, it was the first time since December 2000 that saw both the Dow green and the Nasdaq fall at least 1% for two consecutive days. The number of issues that made a new 52-week low on the NYSE jumped up to 120, the most since mid-November. It is important to remember that although historically, December might be very strong for equities, the gains tend to happen later in the month. In fact, going back to 1950, the average monthly return for the S&P 500 on December 15 has been flat, before a gain of 1.6% by the end of the month.

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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.

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