Market Update: Friday, December 16, 2016

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  • Equities continue higher; bonds advance. (10:19am ET) Domestic stocks are trading slightly higher this morning as investors consider weak housing starts data and continue to digest the Federal Reserve Bank (Fed) rate hike and revision to the dot plots. The S&P 500 gained 0.4% Thursday, closing off of its highs after a strong start to the day. Financials (+1.0%) and materials (0.7%) resumed their recent sector leadership while real estate (-0.7%) was the worst-performing sector on the day. Overseas, the Nikkei (+0.7%) made another new high on the year and the Shanghai Composite managed a 0.2% gain; European markets are higher again today as the EuroStoxx 600 has climbed 0.4%. Meanwhile, precious metals have rebounded modestly from yesterday’s rout: COMEX gold ($1134/oz.) is up nearly half a percent and silver a similar percent after sliding 7%. Finally, WTI crude oil ($51.52/barrel) is up 1.2% as OPEC production cuts remain on track, and the yield on the 10-year note has backed off of a two-year high to trade at 2.58%.

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  • 2016 calendar winding down. Although there are a few key events on tap next week (i.e., a speech by U.K. Prime Minister Teresa May on Brexit, the Bank of Japan’s final policy meeting of the year, Vladimir Putin’s only press conference of 2016) the calendar is fairly quiet. Data on new and existing home sales, the service sector Purchasing Managers’ Index (PMI) and durable goods orders and shipments are the key U.S. data releases. Overseas, China’s property price indices, and the German IFO reading for December are on tap. It’s a quiet week for the Fed next week.
  • Difficult November for housing. Led lower by a 45% monthly decline in multifamily starts, overall housing starts fell 19% between October and November, falling well short of expectations. Single family starts, which are much less volatile than multifamily, fell just 4% in November, but have increase by 5% from a year ago, indicating a modest rising trend for housing remains in place. Housing has been a plus for gross domestic product (GDP) growth since 2011. We expect housing, which accounts for around 5% of GDP, will add to growth again in 2017.
  • Time for Santa? The well-known Santa Claus Rally is due to start one week from today. This historically bullish timeframe is defined as the last five trading days of the year and the first two days of the following year. Going back to 1950[1], these seven days have been up 1.4% on average and higher 77.3% of the time. Only one day out of the entire year sports a better future seven-day return, so there could be reason to believe in Santa. Here’s the catch; when these historically bullish seven days are red, the following January tends to be weak. In fact, the Santa Claus Rally did not occur in either of the past two years and January was down 3.1% and 5.1%, respectively. So if Santa doesn’t come, it could mean trouble for equities in the near term. Today on the LPL Research blog we will take a look at this popular phenomenon.
  • Big first half of December; what happens now? As of December 15, the S&P 500 was up 2.9% this month. If the month ends with the S&P at this level, it would be the sixth-best December return going back 25 years. Considering there is still half the month to go, what does this mean? Historically, the best part of December is the second half of the month, so does early strength lower the chances of a late-December rally? It doesn’t look like it, as going back to 1950, there were six other years that were up more than 2.9% as of December 15, and all six were actually higher the rest of the month. The average return for the final half of the month was a very impressive 1.7%.

[1] 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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