Market Update: Thursday, January 5, 2017

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  • Markets pause to evaluate ADP report, FOMC minutes. (10:40am ET) The S&P 500 and Dow Jones Industrial Average are modestly lower this morning after the ADP employment report came in below expectations; the more-closely watched U.S. Bureau of Labor Statistics‘ report is due out Friday, January 6. Yesterday, materials (+1.4%), consumer discretionary (+1.3%), and real estate (1.2%) paced the S&P 500 higher (+0.6%) whereas telecom (-0.3%) retraced some of its recent gains. The U.S. dollar slipped after the release of the December Federal Open Market Committee (FOMC) minutes highlighted uncertainty surrounding the impact of President-elect Donald Trump’s policies on the path of fiscal policy and interest rate hikes. In Asia, a strengthening yen pressured the Nikkei (-0.4%), while both the Hang Seng (+1.5%) and Shanghai Composite (+0.2%) advanced. European shares are near flat across the board, with the STOXX Europe 600 up less than 0.2%. Meanwhile, WTI crude oil ($53.91/barrel) has moved up 1.2%, COMEX gold ($1181/oz.) continues to rally off of its December lows, and Treasury strength has lowered the yield on the 10-year note to 2.40%.

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  • Under new methodology, ADP employment report continues to suggest tightening labor market. Until recently, ADP, the nation’s largest payroll processing firm, used only its database of payroll data to make its estimate of private sector employment each month. A few years ago, ADP started adding other, publicly available data on employment to supplement its forecast. Effective as of the October 2016 report, ADP added oil prices, initial claims, consumer sentiment, and the Conference Board Leading Economic Index (LEI). The December 2016 reading said that the economy created 153,000 new private sector jobs, 22,000 fewer than expected by the consensus of economists as polled by Bloomberg (+175,000). The November 2016 reading on ADP was essentially unrevised at +215,000.  The ADP report, once a key input for making forecasts of the U.S. Bureau of Labor Statistics’ jobs report, has faded recently as a forecasting tool, as it no longer relies on only its own, proprietary information.
  • Claims move sharply lower on holiday distortions and early shutdowns of vehicle assembly plants and continue to point to a tighter labor market and 2-3 Fed rate hikes this year. Initial claims for unemployment insurance fell to 235,000 in the week ending December 31, the lowest reading in two months and very close to the lowest level in more than 40 years. Record-cold weather in much of the nation during mid-December and some early shutdowns at auto plants likely artificially pushed claims higher in mid-December. The drop over the past few weeks is likely “payback” for that rise. Claims will remain subject to year-end, quarter-end, and holiday distortions for the next few weeks or so.
  • FOMC minutes suggest a steady but gradual rise in rates. Amid extensive discussion about the potential impact of fiscal policy on the economy, the FOMC continued to push the idea that it would raise rates gradually this year if the economy and labor market track to the FOMC’s forecast. We continue to expect the Federal Reserve Bank (Fed) will raise rates two to three times in 2017. The next FOMC meeting is in late January/early February 2017. We (and the market) do not expect the Fed to hike rates as soon at this meeting. View the full minutes here.
  • Bulls continue to grow. After the huge year-end rally and optimism over the potential for an improving economy in 2017, the number of bulls in various sentiment polls continues to climb. In the American Association of Individual Investors (AAII) Sentiment Survey, for instance, 46.2% voted they were bullish, the third-highest reading in the past 23 months. Meanwhile, the Investors Intelligence US Advisors’ Sentiment survey had more than 60% bulls for the first time since mid-2014. When sentiment becomes too one-sided, this can be a potential warning sign, and we will continue to monitor this.
  • Santa came after all. The S&P 500 squeaked out a gain of 0.4% during the historically bullish seven-day period known as the Santa Claus Rally, which ended yesterday. As we’ve noted a few times, the big warning comes when this historically bullish time is red; when this happens, January tends to be weaker and has seen some large drops in the past few years. This year, the Santa Claus Rally avoided its first three-year losing streak since WWII. Lastly, when the Santa Claus Rally has been green, the the entire month of January has been up 1.3% on average since 1950[1], slightly better than the average January gain of 1.0%.

[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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Wednesday

  • Vehicle Sales (Dec)
  • Minutes of the December 13-14 FOMC Meeting Released
  • Eurozone: CPI (Dec)

Thursday

  • ADP Employment (Dec)
  • ISM Non-Mfg. (Dec)

Friday

Saturday

  • China: Imports and Exports (Dec)

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.

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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.

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