/perspectives/weekly-viewpoint/is-the-trump-bump-starting-to-level-out

Is the Trump Bump Starting to Level Out?

The major market indices finished the week little changed as investors digested the FOMC rate hike and indications for a more aggressive path forward along with the implications of the back-up in bond yields and the strength in the US dollar.

December 19, 2016    |    By Mike Schwager

Performance for Week Ending 12/16/2016:

The Dow Jones Industrial Average (Dow) added 0.44%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.33%, the Standard & Poor’s 500 Index (S&P 500) finished off 0.06% and the Nasdaq Composite Index (NASDAQ) fell 0.13%. Sector performance was mixed with 6 of the S&P sector groups finishing higher 5 finishing lower. The Telecom (+2.26%) posted the best gains while Industrials (-1.60%) was the biggest loser.

Index* Closing Price 12/16/2016 Percentage Change for Week Ending 12/16/2016 Year-to-Date Percentage Change Through 12/16/2016
Dow 19843.41 +0.44% +13.88%
Wilshire 5000 23600.09 -0.33% +11.49%
S&P 500 2258.07 -0.06% +10.48%
NASDAQ 5437.16 -0.13% +8.58%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 12/5/16 – 12/9/16

The major market indices finished the week little changed as investors digested the FOMC rate hike and indications for a more aggressive path forward along with the implications of the back-up in bond yields and the strength in the US dollar. Higher yields could put downward pressure valuation multiples while the stronger US dollar could impact earnings at companies with large exposure to international markets. Offsetting the downside was fading concerns surrounding the Italian banking system and better economic data out of China. In addition, selling pressure has been short-lived, due to, I suspect, year-end performance anxiety as underperforming portfolio managers use weakness as an opportunity to play catch-up.

FOMC Meeting: At the conclusion of last week’s Federal Open Market Committee (FOMC) meeting the Fed lifted rates by a quarter percentage point. While the rate hike was widely anticipated, the Fed also indicated a steeper path for borrowing costs in 2017, saying inflation expectations have increased “considerably” and the labor market continues to tighten. The Fed’s new projections show central bankers now expect 3 quarter-point rate increases in 2017, up from the two seen in the September update. The market’s initial perception to the Fed’s more ‘hawkish’ stance was negative, however, the reality is that a more aggressive path forward is confirmation that the economy continues to gain momentum.

Looking Ahead: While the markets have certainly seen a favorable post-election reaction, the gains appear to be based on the ‘potential’ benefits of the new administration’s proposed policies. Sustainability of the rally will likely require specific details and certainty that these policies will be implemented on a timely basis. We also have to be cognizant that most of president-elect Trump’s proposals, are likely to take some time to be put in place, and may not have a positive economic impact for many months thereafter. Political expectations are very elevated and therefore, news flow and developments that goes against the “bullish grain” could result in a setback for the market. If stocks were to pause in the coming weeks, the selling would likely be corrective in nature and not the start of a much broader leg lower.

At the end of the day, its fundamentals not politics that matter—things like economic growth, earnings growth, and monetary policy—all of which currently remain supportive. This was underscored by Fed Chairman Yellen last week. Yellen stated that the economy is already improving and really doesn’t need fiscal stimulus given the current level unemployment. While the economy is on solid footing, the new administration’s pro-business policies of infrastructure spending, defense spending, individual and corporate tax cuts, and deregulation all are very growth friendly and certainly have the ability to enhance the current pace of growth.

Macro Factors Remain Supportive:

  • The US economy continues to grow. Data reports of late have been solid and suggest economic momentum has been picking up during the latter half of the year. The third quarter GDP showed growth of 3.2% and the Atlanta Fed GDPnow tracking model is suggesting Q4 growth of 2.6%. Both figures are significantly better than the 1% growth seen during the first half of this year. If the proposed policies from the new administration are put in place on a timely basis, the risk to growth expectations in the New Year will likely be skewed to the upside.
  • Earnings growth has turned the corner. After several quarters of negative growth, the earnings drought came to an end during the recently wrapped up third quarter reporting season. In addition, forward earnings expectations are being raised in anticipation of corporate tax reform and a pick-up in economic conditions.
  • Despite the Fed raising rates at the recent FOMC meeting and signaling the likelihood of three rate hikes next year, interest rates will still be low by historical terms and are expected to remain supportive of risk assets.

Bottom-line: The rally over the past several weeks has left the market in a technically ‘overbought’ condition, however, the march higher is not likely over. The new administration’s pro-business policies are very growth friendly and have the ability to significantly enhance the economic and earnings outlook. While the equity markets could see some consolidation in the coming weeks, the macro environment remains supportive, suggesting the domestic equity markets should continue to have an upward bias over the intermediate term.

The Week Ahead: With just a couple weeks until year-end, both the data and events calendar will remain relatively light. Fourth quarter earnings season won’t kick-off until mid-January, however there will be 13 “early reporters” scheduled to release results during the coming week including Dow-component Nike on Tuesday. Focal points on the data calendar include November existing home sales, November durable goods orders, November personal income and spending, the final revision to third-quarter GDP, November new home sales and the December University of Michigan consumer sentiment survey. The Fed speaking calendar is quiet with the exception of a speech by Fed Chair Yellen in Baltimore on Monday.

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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