Market Update: Friday, December 9, 2016

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  • Stock rally rolls on. (10:27am ET) Global equities are continuing to move higher this morning as domestic indexes hover near yesterday’s record-setting levels, which came amid another day of widespread sector gains led by financials; industrials, consumer staples, and telecom weighed on the S&P 500 (0.2%), but not enough to pull it into negative territory. In overnight trading, an acceleration in Chinese inflation was met with mixed reactions, pushing the Shanghai Composite up half a percent, while the Hang Seng fell nearly as much. The data, coupled with yen weakness, helped the Nikkei (1.2%) hit 12-month highs. European markets are poised for their best weekly gain since February, led by bank stocks on the heels of a steepening yield curve. Elsewhere, WTI crude oil ($51.42/barrel) is moving higher after a recent bout of weakness, COMEX gold ($1162/oz.) is lower, and Treasury yields are near flat at 2.41%.

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  • FOMC and much, much more. The Federal Reserve Bank’s (Fed) Federal Open Market Committee (FOMC) will hold its eighth and final meeting of 2016 next Wednesday, and it will likely raise rates by 25 basis points (0.25%), a move that is fully priced in by the fed funds futures market. In addition, the FOMC will release a new set of dot plots and economic forecasts for 2017 and beyond. But that’s not all. Next week is chock full of key economic data for November and December, including reports on housing, inflation, consumer spending, and manufacturing. Overseas, the key ZEW report in Germany and the Tankan survey in Japan are due out, and China will continue releasing its data set for November. The Bank of England meets next week as well and is expected to stand pat. Mexico’s central bank is likely to raise rates, as inflation is heating up south of the border.
  • Sneaky one-week winner. Despite the 10-year yield near multi-year highs, the interest rate sensitive real estate sector has staged an under-the-radar rebound over the past week as markets continue to focus on the so-called Trump trades, i.e., financials, industrials, energy, and small caps. The S&P 500 real estate sector returned 5.0% over the past week, topping all other S&P sectors, after underperforming the broad S&P 500 by more than 600 basis points (6.0%) from the election through December 1. We like the sector (and master limited partnerships) for yield-oriented investors, given our expectation that interest rates stabilize in the recent range at or below 2.50%, with upside risk in 2017 of only about 25 basis points. In general, we do not see evidence of overbuilding that would potentially bring the real estate cycle to an end, valuations appear reasonable, and we expect continued, steady cash flow growth from the sector overall, consistent with a favorable supply-demand picture across most segments and rising inflation.
  • Europe shines this week. It has been a big week for European equity markets, as the EURO STOXX 50 was up 5.6% for the week as of last night, for the best weekly gain since October 2015. Breaking it down some, Italy has been the big laggard in Europe this year. However, even after the “no” vote for the Italian referendum, the Italian FTSE MIB was still up 7.8% for the week–the best week in more than five years. The German DAX and Paris CAC 40 have both broken out to new 2016 highs as well. Today on the LPL Research blog, we will take a closer look at European markets and how much they have improved.
  • The win streak continues. The S&P 500 is up five consecutive days; it hasn’t been up six in a row since June 2014. In fact, the past five times it was up five days in a row, it was down on the sixth day. The longest win streak since 2009 has been eight in a row twice in 2013, and the all-time record win streak is 14 in a row from March and April 1971.
  • Volatility gains again. Remember Wednesday was a very rare day, as the S&P 500 gained 1.3%, yet the Volatility Index (VIX) gained more than 3%. The last time that happened while the S&P also made a new 52-week high was March 2000 (right before the bear market). Of course, the last time it happened on any day (not just a new high) was in July 2009 (early on in this nearly eight year old bull market). So there’s something to cheer for bulls and bears alike. Well, yesterday the S&P 500 closed in the green again as did the VIX–so both have been green two consecutive days. The last time that happened was February 2012, and March 2006 before that. Incredibly, this has never happened three straight days. In other words, rising volatility and rising equity prices are very rare.

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Friday

Consumer Sentiment and Inflation Expectations (Dec)

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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.

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