- Stocks search for direction as oil spikes. Global markets are mixed in Monday sessions, failing to get a lift from a 4.5% rise in WTI crude oil ($53.83/barrel). Oil’s surge comes after non-OPEC producers agreed to cut output by 585,000 barrels per day. Domestic indexes are mixed after the S&P 500 rose over 3% last week on strength in the heavily weighted technology and financials sectors. Looking ahead, investors will be watching the Federal Open Market Committee (FOMC) this week; the market is expecting a rate hike of 25 basis points (0.25%). Overseas, Chinese markets sold off as the Shanghai Composite lost 2.5% and the Hang Seng shed 1.4%; Japan’s Nikkei gained 0.8%. Weakness in China came on the heels of a ban on leveraged stock purchases by the country’s insurers. European markets are near flat with the exception of Italy’s MIB (+0.9%), continuing its rally after the failed constitutional referendum. Meanwhile, COMEX gold ($1161/oz.) is modestly lower, extending a five-week slide, and the yield on the 10-year Treasury note is up to 2.50%.
- Oil rallies on OPEC and non-OPEC news. Consistent with the Organization of Petroleum Exporting Countries (OPEC) meeting on November 30, eleven non-OPEC producers announced plans to cut OPEC production, though possibly below the 600,000 barrel per day production cut promised. In addition, Saudi Arabia suggested that it might cut production even more than it had announced on November 30. The market views compliance with new production quotas as key to maintaining prices at current levels, if not higher.
- FOMC and much, much more. The Federal Reserve Banks’s (Fed) FOMC will hold its eighth and final meeting of 2016 on Wednesday, and it will likely raise rates by 25 basis points (0.25%), a move that is fully priced in by the fed funds futures market. In addition, the FOMC will release a new set of dot plots and economic forecasts for 2017 and beyond. But that’s not all. This week is chock full of key economic data for November and December, including reports on housing, inflation, consumer spending, and manufacturing. Overseas, the key ZEW report in Germany and the Tankan survey in Japan are due out, and China will continue releasing its data set for November. The Bank of England meets this week as well and is expected to stand pat on rates. Mexico’s central bank is likely to raise rates, as inflation is heating up south of the border.
- FOMC FAQ. This week we’ll cover several key questions ahead of this week’s eighth and final FOMC meeting of 2016. While a rate hike later this week is fully priced in by markets, there are still plenty of questions surrounding the Fed as 2016 turns into 2017.
- Growth starting to look cheap versus value. Based on the Russell indexes, following value’s outperformance this year, growth is now as cheap relative to value as it has been at any point since the financial crisis. We still think style balance, or a slight growth overweight, are prudent at this point in the business cycle, but note that relative valuations (growth is at a 13% premium to value, about half its 15-year average) and the magnitude of the financials-driven value rally may make it difficult for value to continue its momentum.
- Small caps starting to get expensive. Following recent strength, small caps are starting to look expensive versus their large cap counterparts. The Russell 2000 is now trading at a 42% premium to large caps on a forward price-to-earnings basis, about ten percentage points above the 15-year average premium. We have a slight positive bias toward small caps in the first half of 2017 on prospects for corporate tax reform and less foreign trade risk, but valuations and the magnitude of the small cap rally may make it difficult for small caps to continue their momentum and we would not be surprised if cap leadership reversed later in 2017.
- Surging bond yields have not spooked stock market investors. This week, we look at when rising interest rates might begin to hurt stock prices. It is logical to think higher rates will eventually slow the economy as borrowing costs rise and inflation erodes purchasing power. But given the still low rate environment, the market is interpreting higher interest rates as a signal of improving growth expectations, not worrisome inflation, and we do not think rising interest rates put the bull market at risk.
- The rally continues. The S&P 500 gained 3.1% last week and closed higher every single day. You have to go back to June 2014 the last time all five days of the week were higher. It didn’t end there though, as both the Nasdaq and Dow also were green each day, and closed Friday at new all-time highs. The Dow even made a new all-time high all five days, something it hasn’t done for 17 years. The S&P 500 is up six straight days for the first time since June 2014, and it hasn’t been up seven in a row since September 2013. Lastly, momentum has been very powerful the past few years as the previous 10 times the S&P 500 was up more than 3% for the week (like it was last week), it was green the following week.
- How long can the bull market go? With new highs being made across the board for U.S. equities, and European markets finally starting to potentially turn the corner as we noted in last week’s blog post, the big question is how long can this current bull market last? As we will lay out in our 2017 Outlook, we feel that stocks should produce mid-single-digit returns and the bull market could continue through at least 2017.
- China: Retail Sales (Nov.)
- NFIB Small Business Optimism (Nov)
- Germany: ZEW (Dec)
- Japan: Tankan (Q4)
- Retail Sales (Nov)
- FOMC Statement
- FOMC Economic Forecasts and Dot Plots
- Yellen Press Conference
- Japan: Nikkei Mfg. PMI (Dec)
- Empire State Mfg. Report (Dec)
- Markit Mfg. PMI (Dec)
- CPI (Nov)
- Philadelphia Fed Mfg. Report (Dec)
- Eurozone: Markit Mfg. PMI (Dec)
- European Union: Leader Summit in Brussels
- UK: Bank of England Meeting (No Change Expected)
- Mexico: Central Bank Meeting (Rate Hike Expected)
- Housing Starts and Building Permits (Nov)
- Lacker (Hawk)
 We expect mid-single-digit returns for the S&P 500 in 2017 consistent with historical mid-to-late economic cycle performance. We expect S&P 500 gains to be driven by: 1) a pickup in U.S. economic growth partially due to fiscal stimulus; 2) mid- to high-single-digit earnings gains as corporate America emerges from its year-long earnings recession; 3) an expansion in bank lending; and 4) a stable price-to-earnings ratio (PE) of 18 – 19.
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.