Market Update: December 5, 2016

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  • Global stocks shake off Italy vote; oil moves higher. U.S. indexes are moving higher in early trading, boosted by resilience in European equities after Italians voted down the country’s constitutional referendum on Sunday; rising WTI crude oil prices are also lending support. This comes after the S&P 500 failed to hold early gains in Friday’s session, as strength in defensive stocks was not enough to overcome weakness in the heavily weighted financials and consumer discretionary sectors. Overseas, Asian markets finished mostly lower; the Shanghai Composite (-1.2%) and the Hang Seng (-0.2%) both declined, whereas Japan’s Nikkei (-0.8%) took a breather after reaching 11-month highs last week. Stocks in Europe recovered from early selling pressure following Sunday’s vote in Italy; the STOXX 600 is up 0.4% mid-afternoon. Elsewhere, oil ($51.88/barrel) is tracking near 12-month highs on optimism around last week’s Organization of the Petroleum Exporting Countries (OPEC) deal, COMEX gold ($1163/oz.) is off 1.24%, and Treasuries are falling as the yield on the 10-year note trades at 2.44%.

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  • Quiet week ahead for data as investors mull election results in Europe. As is typically the case in the week after the release of the U.S. monthly jobs report, released last Friday, December 2, 2016, this week’s U.S. economic calendar is relatively quiet, with today’s key release being the service sector Institute for Supply Management (ISM) reading for November. After a flurry of Federal Reserve Bank (Fed) speakers today, December 5, the unofficial “quiet period” for the Fed begins, ahead of the December 13-14, 2016 Federal Open Market Committee (FOMC) meeting. Overseas, China will begin to report its November data set this week, and the central banks of Canada, Australia, and India all meet. With the Italian referendum and the Austrian election in the rear-view mirror, the key event in Europe this week is the European Central Bank‘s policy meeting on Thursday, December 8.
  • European equity markets, and the euro itself, are positive after yesterday’s voting. As widely expected, the Italian people voted against a referendum that would restructure how the country’s Senate would be elected, leading to the resignation of Prime Minister Matteo Renzi. His resignation opens the door for the anti-European Five Star party to gain political strength, and perhaps even lead the next Italian government. Although this is potentially destabilizing, the markets had well priced in the outcome of this vote. At the same time, Austrian voters rejected an anti-European candidate from the far right as their president. Though the presidency in Austria is relatively weak, the election of a far-right candidate would have been seen as another threat to European political integration and the euro itself. This positive surprise has helped the markets (outside of Italian stocks) remain buoyant.
  • Beige Book recap. The themes in the November 2016 Beige Book are consistent with our view that the Fed will raise rates later this month. At +64, the November Beige Book 2016 reading is now back in the middle of the range it has been in since early 2012. Despite the elevated level of uncertainty surrounding the U.S. presidential election and the outlook for the global economy, optimism on Main Street still reigns.
  • Irrational Exuberance Part 2? Twenty years ago today, Fed President Alan Greenspan gave his now famous Irrational Exuberance speech regarding over-valuations in the equity markets. Today, we examine if we are in another state of irrational exuberance. One concern is valuations are indeed higher than historical norms, although they are by no means near the euphoric levels of the late 1990s. On the fundamental front, the economy continues to show growth consistent with mid cycle, not late cycle. Last, overall market sentiment is showing many more bulls than we saw a month ago, but it still isn’t near the levels of excitement seen at previous market peaks.
  • Santa tends to come late. We all know that December is historically a strong month or equities, with the S&P 500 up 1.6% on average since 1950[1]. Here’s the catch: nearly all the gains tend to happen the second half of the month. Since 1950 on average, the S&P 500 has been flat as of December 15, rallying strongly during the second half of the month. The past 20 years, the S&P 500 has actually been down 0.4% as of mid month, before finishing 1.3% higher on average.

[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.

MonitoringWeek_header

Monday

  • ISM Non Mfg. (Nov)
  • Dudley (Dove)
  • Evans (Dove)
  • Bullard (Hawk)

Tuesday

  • FOMC Quiet Period Begins

Wednesday

  • India: Reserve Bank of India Meeting (No Change Expected)
  • China: Imports and Exports (Nov)

Thursday

  • Flow of Funds (Q3)
  • Eurozone: European Central Bank Meeting (No Change Expected)
  • China: CPI (Nov)
  • Japan: Economy Watchers Survey (Nov)

Friday

  • Consumer Sentiment and Inflation Expectations (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. 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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