Monthly Market Insights | December 2016

U.S. Markets

A surprise election outcome ignited an unexpected rally that pushed stocks into record territory, as investors anticipated faster economic growth, lower corporate taxes and increased infrastructure spending under the newly elected president.

For the month, the Dow Jones Industrial Average jumped 5.4 percent, the Standard & Poor’s 500 Index gained 3.4 percent, and the NASDAQ Composite rose 2.6 percent.1

Head Fake

The wave of investor selling overseas in response to the U.S. election results threatened to extend to domestic stocks, with U.S. stock futures down sharply prior to the first day of post-election trading. However, instead of dropping, stock prices jumped as investors appeared to focus more on the potential positives of a Trump presidency than its uncertainties.

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Along with the rally in prices came a weakening in the strong correlations among industry sectors that have existed for some time now. For example, since the election, the correlation between financial stocks and the S&P 500 Index fell to 0.59, down from 0.89 on November 7.2 (A correlation of 1.0 indicates the two are moving in perfect harmony.)

Correlation Watch

When examined more broadly, a benchmark measuring the anticipated average correlation among stocks dipped to its lowest level since 2008.3  Whether lower correlations become a more permanent feature of the markets remains a question mark.

Long-Term Trend?

Should the larger dispersion of returns among industry sectors persist, the ability of investors to separate leaders from laggards may be met with greater reward than it has been met with in the recent past. In short, a weakening in correlations potentially could mean more opportunities for active managers to outperform popular indexes.3

After posting gains for three straight weeks in November, market momentum stalled in the closing days of trading, despite news that OPEC nations reached an agreement to cut oil production.

Sector Performance

The majority of industry sectors posted strong gains, led by Financials (+12.34 percent) and Industrials (+9.16 percent). Also advancing were Consumer Discretionary (+5.77 percent), Energy (+2.10 percent), Health Care (+2.40 percent), Materials (+5.74 percent) and Technology (+1.33 percent). Meanwhile, Consumer Staples (-2.41 percent), Real Estate (-0.49 percent) and Utilities (-0.39 percent) ended lower.4

us-market-11-2016

World Markets

World markets did not participate in the stock market rally experienced in the U.S., with the MSCI-EAFE Index sliding 2.05 percent for the month.5

Some European markets struggled in November, weighed down by persistent economic weakness and growing concerns about spreading populism in the wake of Brexit and the election of Donald Trump. U.K. and Germany closed lower while France posted a slight gain.6

Markets in the Pacific Rim grappled with their own challenges, while Australia managed a slight gain on stronger commodity prices.7

World Markets 11-2016.png

Indicators

Gross Domestic Product: The economy expanded at a rate of 3.2 percent in the third quarter, up from the initial estimate of 2.9 percent. This represents the strongest growth in two years.8

Employment: The unemployment rate dipped to 4.9 percent as employers added 161,000 new nonfarm jobs, while the prior two months saw upward revisions from original estimates. Average hourly earnings for private-sector workers jumped 2.8 percent, year-over-year, the largest such increase since June 2009.9

Retail Sales: On the eve of holiday shopping season, retail sales jumped 0.8 percent, while September sales were revised upward to 1.0 percent, from the originally reported 0.6 percent increase. These back-to-back increases represent the best two months in at least two years.10

Industrial Production: Industrial output was unchanged in October as unseasonably warm weather kept home and office heating demands low.11

Housing: Housing starts increased 25.5 percent, the fastest pace since August 2007. Through October-end, starts were higher by 5.9 percent.12

Sales of existing homes increased 2.0 percent, touching a sales level not seen since February 2007.13

New home sales, however, declined 1.9 percent in October, though they are 12.7 percent higher year-to-date over the same 10-month period last year.14

CPI: Consumer prices jumped 0.4 percent from a month earlier. When compared to a year earlier, the increase represents the fastest rate in two years, signaling firming inflationary pressures.15

Durable Goods Orders: Posting the biggest increase in a year, orders of durable goods jumped 4.8 percent in October, propelled by a nearly 100 percent increase in civilian aircraft orders. September’s durable goods orders were revised higher, from an initial decline to a 0.4 percent gain.16

The Fed

In testimony to Congress, Janet Yellen on November 17 reiterated her belief that the U.S. economy is stable enough to absorb an interest rate hike, telling lawmakers that such an increase might come “relatively soon.” Her comments confirmed market expectations of a Fed hike in the federal funds rate at its next meeting on December 13-14.17

What Investors May Be Talking About

December is one of the best performing months on an historical basis. Since 1926, it has experienced the highest number of positive monthly returns of any month, the fewest number of negative returns, the least performance volatility and the second highest average return.18

Since past performance is not indicative of future results, this December’s market performance may turn on how investors respond to the wealth of news that unfolds over the course of the month.

Secrets of the Temple

Perhaps the most critical news might be what the Fed does about the federal funds rate. The Fed has signaled that a hike may be likely in December, though they may reconsider taking action in light of the unexpected election result.

If they move ahead with a rate hike, how the markets will respond may depend on whether this anticipated action has been fully priced in the markets. In the alternative scenario where the Fed delays a rate hike, the market’s response may be even greater, though no one can be sure in which direction such a development would drive stock prices.

Cabinet Positions

There is a Washington D.C adage, “personnel is policy.” This may never be truer when it comes to the incoming Trump presidency. Markets may be watching very closely any news about potential Cabinet appointments as a sign of the policy direction that the new administration may be taking once it assumes office in January.

Markets also are expected to keep an eye on consumer spending, which accounts for more than two-thirds of GDP.19 No month is more critical than December for retail sales.

Retail Spending

For some retailers, the holiday season can represent as much as 30 percent of annual sales, with jewelry stores reporting the highest percentage (27.4 percent) during the 2015 holiday season. Overall, last year’s holiday sales represented nearly 20 percent of total retail industry sales.20

As December marks the close of 2016 and represents the gateway to a new year, the uncertainty that reigns over the economic and foreign policies that will be pursued by President-elect Trump may lead to bouts of market skittishness in the weeks and months ahead.

By the Numbers

Beginnings and Endings

Year the first “greenbacks” were issued in the U.S.: 186121
Birth of the mail-order catalog: 174422

The first self-made multimillionaire in America: John Jacob Astor (1763-1848)23Famous hotel co-founded by Astor’s grandson and namesake: The Waldorf-Astoria24
How Astor’s grandson died in 1912: Aboard the Titanic24

First year Social Security taxes were collected: 193725
Size of the first lump-sum Social Security check: 17 cents25

Approximate number of kindergarteners in the U.S.: 3.7 million26
Approximate number of students who graduate from high school each year: 3.5 million26
Percent of graduating seniors who enroll in college the following fall: 68.4%26

Approximate number of new businesses started in the U.S. last year: 680,00027
Share of new businesses that survive 20 years or more: About 1 in 527

Success rate of businesses whose founder has previously started a successful business: 30%28
Success rate for businesses whose founder has previously failed with a start-up: 20%28
Success rate for first-time entrepreneurs: 18%28

Average retirement age: 6329
Share of Americans who plan to “keep working as long as possible:” 27%30

Number of AirBnB users over age 60: 1 million31
Percent of AirBnB hosts over age 60: 10%31

Percentage of retirees who say going on an RV trip is very appealing: 24%31
Most popular bucket list item, according to bucketlist.net: See the Northern Lights32

 

 

 

 

 

 

 

  1. The Wall Street Journal, November 30, 2016
  2. The Wall Street Journal, November 23, 2016
  3. The Wall Street Journal, November 23, 2016
  4. Interactive Data Managed Solutions, November 30, 2016
  5. MSCI.com, November 30, 2016
  6. MSCI.com, November 30, 2016
  7. MSCI.com, November 30, 2016
  8. The Wall Street Journal, November 29, 2016
  9. The Wall Street Journal, November 4, 2016
  10. The Wall Street Journal, November 15, 2016
  11. The Wall Street Journal, November 16, 2016
  12. The Wall Street Journal, November 17, 2016
  13. The Wall Street Journal, November 22, 2016
  14. The Wall Street Journal, November 23 18, 2016
  15. The Wall Street Journal, November 17, 2016
  16. The Wall Street Journal, November 23, 2016
  17. The Wall Street Journal, November 17, 2016
  18. Yardeni Research, “Stock Market Indicators: Historical Monthly and Annual Returns,” Yardeni Research,” October 2, 2016
  19. The Wall Street Journal, October 14, 2016
  20. National Retail Federation, 2016
  21. UScurrency.gov, 2016
  22. Wikipedia, October 20, 2016
  23. Britannica.com, 2016
  24. Encyclopedia-Titanica.org, 2016
  25. Social Security Administration, 2016
  26. NCES.ED.gov, 2016
  27. Bureau of Labor Statistics, April 28, 2016
  28. Inc.com, October 21, 2015
  29. SmartAsset.com, October 28, 2016
  30. Bloomberg, May 13, 2016
  31. Forbes, June 3, 2016
  32. BucketList.net, 2016

Source: Lake Avenue Financial

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