Welcome to the new year!
The week that was…
The four day week was a bit more negative than usual around the holiday but within the context of the post election rally it was not surprising – Santa came very early this year to the stock market. Wednesday saw the most losses with mild action the other 3 sessions. Volume was low as usual this time of year; next week will bring traders back to the fray. Dow 20K remained a mental roadblock. As we said in last week’s recap it would be quiet out there and economic news not market moving!
For the year the S&P 500 gained 9.5% and the NASDAQ 7.5%; most of these gains came post election of course. The Russell 2000 has been on an absolute tear post election and finished up 19.4%! We don’t talk about the Dow Jones Industrial Average much as it’s a very concentrated index of a very small amount of stocks but if you are old school, the index outperformed the S&P 500 for the first time in five years, posting a 13.4% gain.
Turning across the pond, remember when the mainstream financial media told us “Brexit” would destroy the UK and unleash the zombie apocalypse? Not so much – the market is at all time highs, and on another tear to end the year. The FTSE gained 14.4% in 2016, its biggest advance since 2013.
“The FTSE has been helped by two factors this year. When we started in 2016, commodities, such as oil and mining, were massively out of favor and massively underperformed, which created a huge opportunity. Mining shares got very, very cheap and if you take a look at BHP Billiton , the world’s largest miner, shares have more than doubled from the lows of late January,” said Chris Bailey, market analyst at Financial Orbit. “The second factor was the Brexit vote in June. When the pound fell, the fact that such a high proportion of FTSE 100 earnings come from outside the U.K. started to be a big influence,” he added. The pound has plunged 17% against the dollar in 2016, yanked lower by concerns over the country’s vote in June to leave the European Union, dubbed Brexit. Against the euro, sterling is down 14% for the year.
Here is a 5 day “intraday” chart of the S&P 500 via Doug Short.
Some 2017 market previews/2016 market reviews:
- Infrastructure spending—The potential for increased government spending on roads, bridges, and the military, among others, could boost certain energy, materials, and industrial stocks.
- Regulatory environment—The new administration’s stance on financial and environmental regulation could affect financial and energy stocks.
- Bio-therapeutics—Advances in cardiovascular preventive drugs, Alzheimer treatments, and immune-oncology treatments may drive health care stocks.
- Big data—Select real estate stocks, such as REITs, that operate modern warehouses and data centers may be able to capitalize on the big data trend.
- Artificial intelligence—The pace of change in AI is accelerating, with certain tech companies emerging as key leaders.
- Internet of things—Self-driving vehicles, wearable devices, robotics, unified control modules and sensors, and telematics may spark some tech, industrial, and energy stocks.
- The Fed. On December 14, 2016, the Fed raised rates for just the second time since 2006. The central bank stated that it expects it may raise rates three more times in 2017. Rising rates can be positive for parts of the stock market, like some financial stocks, and a headwind for others.
- Government spending. Policy initiatives by the new U.S. administration might affect different segments of the market. For instance, increased infrastructure spending could be a catalyst for some industrial, defense, and material stocks.
- The business cycle. The U.S. economy is progressing toward the late-cycle phase, which tends to benefit materials, energy, health care, and consumer staples stocks.
- Valuations. All of the U.S. major indexes are at all-time highs, and the S&P 500’s next 12 months’ P/E of 17.1x represents a nearly 19% premium to the 10-year average P/E of 14.4x (which is to say that, broadly speaking, the market as measured by the S&P 500 could be considered expensive, based solely on this metric). Financials and utility stocks are the only sectors trading at a discount to the S&P 500’s P/E ratio (see the table above).
- Inflation. Core inflation (excluding energy prices) and oil prices poised to rise above early-2016 trough levels, which would mean rising prices. That could affect consumers—as well as investors—across a broad range of industries.
- China. 2016 kicked off with a significant increase in volatility as concerns over slowing growth in China rattled global markets. Continued industrial overcapacity and an overextended credit boom may hinder the world’s second-largest economy, which appears to have entered the early-cycle phase of a recovery.
C) Bespoke has a massive 178 page report – it’s hyuuuge…trust me. You need to be a Premium member to read it but a snippet of their market preview:
This brings us to the market itself. Based on the traditional definition of a bull market, the nearly eight year bull run ranks as the second longest and third strongest going back to 1928. While it may be getting long in the tooth, it is just coming out of a long pause. Prior bull markets that saw similar pauses saw big gains in the year after they broke out of the consolidation period. As we close out 2016, we are only six months removed from that break out.
When it comes to recent market views towards the markets, economy and Washington, we are reminded of the song “Sunshine, Lollipops, and Rainbows.” Yes, the improved tone and policies out of DC are likelier to be more pro-business than they have been in some time. The question is how much will the market get, and how long it will take to get it? Right now, the market expects more, more, more, now, now, now. The way things usually work out, though, it will probably be at the very least a little less, less, less, later, later, later.
The S&P 500 has now been up on a total return basis for eight straight years of which we have been mostly bullish over that span. The all time record for consecutive up years is nine (1991—1999), so another year of gains would tie that record, which would be great. We hope that “Everything that’s wonderful is sure to come your way,” but our concern is that there will at least be some trouble along the way. Markets typically climb a wall of worry, but right now there doesn’t seem to be much of it around.
Once you got past January it was a pretty solid year.
Also if you only hung around on Tuesdays and Wednesdays you did well. Now if someone could tell me the correct 2 days to focus on in 2017 that would be much appreciated!
Not from Bespoke… but this is fun – click on it to enlarge.
The week ahead…
Katie Stockton finally got it right – a down week. Another 4 day week ahead with Monday off. Looking ahead to the first week of every month we have a good spate of economic data:
- Tuesday ISM Manufacturing, forecast 53.5, up from 53.2 the prior month. Anything over 50 indicates expansion.
- Thursday ISM Non Manufacturing, forecast 57.6, up from 57.2.
- Friday, non farm payrolls of 170K down from 176K the prior month. The unemployment rate is forecast to rise 0.1% to 4.7%.
Federal Reserve minutes will also be released Wednesday.
Looking WAY ahead 2016 was only the third “bullish outside year” since 1928. What is a bullish outside year? Well much like on a daily chart of a stock a bullish outside day is when the price goes BELOW the prior day’s low then closes ABOVE the prior day’s high. That is seen as a good sign technically. Well that just happened for the entire year of 2016 v 2015. What happened the other 2 times? A 28% gain in 1935 and a 17% gain in 1982. Again – SMALL SAMPLE SIZE warning.
Short term: After 2 weeks of consolidation we had some breakdown to the downside on both the major indexes – they both fell out of their wedges and a bit below the 20 day moving averages. Something to monitor if there is not a quick recovery next week.
The Russell 2000 – as has been the case for the past 2 months – performed better than the senior indexes.
The NYSE McClellan Oscillator went negative – let’s keep an eye on it next week when traders return. If it remains negative while indexes hold up, we’ll need to turn cautious near term.
Long term: Here are 5 year charts on the major indexes; for those with this sort of time frame it is going to take a lot of work to get bearish. If the S&P 500 falls below that blue line it might be something to discuss near(er) term.
Charts of interest:
What was the best stock in the S&P 500? Nvidia (NVDA) which snapped a 10-day streak of gains on Wednesday, tumbling 6.9%. However, it tripled on the year. Interestingly, it was among the most shorted stocks out there in large cap land.
Of the stocks in the S&P 500 with market caps of $50 billion or more, NVDA’s short interest is the highest of any…
Sears (SHLD) surged 10% Thursday after the company said it had obtained a secured standby letter of credit facility, easing liquidity concerns. The stock lost more than half of its value since the start of the year.
This week in biotech lottery tickets garnered a massive loss for shareholders of clinical-stage drug company Cempra (CEMP) which plummeted 58% Thursday, after the U.S. Food and Drug Administration said it cannot approve a pneumonia drug without additional safety data and improvements at a manufacturing facility. WOOF – this stock was in the mid $20s just a few months ago.
Things were dour for biotech Innocal (INCL) which plunged Friday after the U.S. Food and Drug Administration issued a refusal to file letter for the company’s product candidate for a treatment for post-surgical pain. Janney analyst Ken Trvobich downgraded the stock to neutral on the news, and slashed his fair value estimate to $2 from $9. He is expecting the news to delay the new drug application by a year and said the company does not have sufficient cash resources to fund its operations through 2017. “We expect the need for additional capital to lead to a future financings that are far more dilutive than we previously estimated,” he wrote.
Have a great week and here is to an interesting 2017!