/perspectives/weekly-viewpoint/a-pause-to-refresh-1

A Pause to Refresh

The S&P 500 finished lower for the first time in four weeks as buyer’s fatigue set in following the post-election rally.

December 05, 2016    |    By Mike Schwager

Performance for Week Ending 12/2/16:

The Dow Jones Industrial Average (Dow) added 0.10%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 1.03%, the Standard & Poor’s 500 Index (S&P 500) finished off 0.97% and the Nasdaq Composite Index (NASDAQ) shed 2.65%. Sector performance was negative with 8 of the 11 S&P sector groups finishing to the downside. The Energy (+2.64%) posted the best gains while Technology (-2.92%) was the biggest loser.

Index* Closing Price 12/2/16 Percentage Change for Week Ending 12/2/16 Year-to-Date Percentage Change Through 12/2/16
Dow 19170.42 +0.10% +10.02%
Wilshire 5000 22928.72 -1.03% +8.32%
S&P 500 2191.95 -0.97% +7.24%
NASDAQ 5255.65 -2.65% +4.96%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 11/28/16 – 12/2/16

The S&P 500 finished lower for the first time in four weeks as buyer’s fatigue set in following the post-election rally. The gains since the election has been based on the ‘potential’ economic benefits of the new administrations proposed policies. The market will now need to see actual details and certainty that these policies will be implemented on a timely basis. Most of Trump’s proposals, however, are likely to take some time to be put in place, and may not have a positive economic impact for many month thereafter. Last week’s selling may suggest that the recent rally is a bit ahead of itself.

The choppiness also seems to reflect two opposing trends: On the upside you have anticipation surrounding Trump’s fiscal proposals, year-end performance anxiety, and favorable seasonal trends (December is typically the best month of the year). On the other side there is growing concerns over US dollar strength, the inhibiting effect of rising yields on valuation multiples, and the very elevated political expectations (which leaves little room for gaffes/delays/etc.). All in all, these issues suggest that the battle between greed and gravity will likely to continue for the foreseeable future.

The Energy and Financials sectors were the best performers last week. Energy benefited from a surge in oil prices after OPEC, which collectively produces more than one-third of the world’s oil, agreed to trim production for the first time in eight years. Financials gained as bond yields and interest rates increased. Technology, which generates a large portion of revenues overseas, was the biggest loser reflecting growing concern over the potential impact from the stronger US dollar and uncertainty surrounding trade policy.

Payroll Report: The Labor Department reported that nonfarm payrolls rose by 178K during the month of November, on target with economists’ expectations of +180K. The unemployment rate fell to 4.6%, well below the 4.9% estimate. On a negative note, average hourly earnings unexpectedly fell by 0.1% during the month and are up a disappointing 2.5% on a year-over-year basis. The report should do little to stand in the way of the Fed lifting rates at its upcoming meeting. During the week Fed Governor Jerome Powell signaled readiness to raise interest rates, as unemployment and inflation approach the central bank’s goals. “The case for an increase in the federal funds rate has clearly strengthened since our previous meeting earlier this month,” Powell said. Fed funds futures are currently discounting a 96% probability of a 25 basis point hike at the conclusion of the December 14 FOMC meeting.

Overbought Not Over: While the rally over the past few weeks has left the market in an ‘overbought’ condition, the march higher is not likely over. The new administration’s pro-business policies of infrastructure spending, defense spending, individual and corporate tax cuts, and deregulation all are very growth friendly. While the equity markets could see some consolidation in the near term—the improving economy, rebounding earnings growth, the resiliency in consumer spending, the ongoing stabilization in oil prices and low interest rate environment – all suggest the domestic equity markets should continue to have an upward bias over the intermediate term.

The Week Ahead: The data calendar will be relatively light in the coming week. Reports of interest include; the November ISM non-manufacturing survey, October factory orders and revised third-quarter productivity, the Labor Department’s October Job Openings and Labor Turnover Survey (JOLTS), and the University of Michigan’s December consumer sentiment survey. The earnings calendar will remain on the backburner with just five members of the S&P 500 scheduled to release results during the week. In observance of the typical blackout period ahead of Fed meeting, the Fed speaking calendar will be light with only three members of the Federal Reserve scheduled to make public appearances.

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

The individual companies mentioned in this piece were for informational purposes only and should not be viewed as recommendations.

The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. This document contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Information in this report does not pertain to any investment product and is not a solicitation for any product. This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its accuracy.




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