January 03, 2017 – KERR MARKET SUMMARY – Volume 7, Number 1
After November’s surprising post-election market rally, one couldn’t be blamed for feeling grateful going into the Yuletide season and basking in the glow of 2016’s YTD returns. With U.S. markets reaching all-time highs, investors have been of good cheer lately – equity markets being stoked for the better part of December as well. While post-election optimism has historically been the norm, investors are downright giddy about President-elect Trump’s prospects for a pro-growth, pro-business Republican administration. In addition, growing U.S. economic momentum and a turnaround in corporate earnings are also contributing to the levity. Finally, investors who may have been late to the party are now arriving and adding to positions.
After three consecutive weekly gains, markets initially began the month on a cautious note with muted volumes, as investors awaited some key upcoming events, such as the Italian referendum and the OPEC meeting. Investors were well pleased on the news that OPEC agreed to production cuts in order to boost oil prices. This improbable agreement surprised many and sent oil prices (and energy stocks) up nearly 9% for the day. The “Trump trade” also continued unabated; beset with optimism for deregulation, fiscal stimulus, reduced taxes and increased infrastructure spending. Demand for shares was also elevated by late-rally joiners and former bears covering their short positions – triggered by the S&P 500 reaching an all-time high. Incoming economic data was also supportive of sentiment, with positive readings on service sector activity, factory orders, and mortgage applications. Overseas, investors rolled with the punches as Italians voted to reject the constitutional reform plan causing the resignation of Prime Minister Matteo Renzi and increased likelihood of new elections. Eurozone stocks rallied however, following a report that the Italian government is taking steps to rescue its troubled banking sector and the ECB promised it would continue to buy government bonds within the Eurozone until its 2% inflation target is reached. For the first fortnight of trading, Canadian and U.S. equities were up 1.5% and 3% respectively. Europe was also up 4% on continued monetary accommodation and a view that the Italian political situation will not affect its EU membership.
The month’s second half started off on a stronger note, led by financial and consumer discretionary stocks, but retreated somewhat on the final trading days of the year on seasonally light trading volumes and profit taking. Oil prices dropped following a larger-than-expected climb in crude stockpiles. In addition, analysts feel oil prices will come under pressure as technological advances and falling costs for shale production will encourage greater supply. Long overdue, the Fed raised interest rates for the second time in this economic cycle and a full year after its first increase. In addition to the 25 basis point hike at the recent FOMC meeting, the new projections call for an accelerated pace of tightening than previously anticipated. Attention now switches to how the Fed will respond to the fiscal stimulus and prospect of inflation championed by President-elect Trump. For the last two trading weeks of the year, Canadian and European equities were up 1% while U.S. markets were off 0.5%.
At the end of the month, Canada’s TSX gained 1.7%, led by Financials (+3.5%), Utilities (+2.9%) and Real Estate (+3.7%). The S&P 500 was up 2% while Europe surged 5.3%. The U.S broad-based bond index continued to slide – down 0.6% on higher inflation expectations. Despite the optimistic outlook for the U.S. economy and turnaround in corporate earnings, equity investors may have overindulged and still face many risks. Should bond yields continue to surge the U.S. dollar would certainly gain more ground – higher yields could challenge equity valuations and a higher dollar could put pressure on corporate earnings. While the Fed will almost certainly continue to raise rates this year, central bankers will likely move slowly and remain responsive. Investors should beware of possible political negatives from Donald Trump’s presidency, such as a muddled foreign policy, currency and trade wars with China, or continued anti-globalization rhetoric. Over the course of 2016, investors have diminished the risk posed be rising valuations and changed their minds about a Trump presidency, increasing the likelihood of more volatility should future headlines disappoint. Fortunately, market pullbacks in the recent past have been brief and followed quickly by hearty risk-on moves. As such, and amidst a seemingly more solid economic and earnings backdrop, we are taking profits by rebalancing back to our original target allocation to equities.
The Thomson Reuters/ University of Michigan consumer sentiment index came in at 98.2 for December, up substantially from 93.8 recorded in November. Consumers were optimistic about the anticipated favourable impact of Trump’s policies on the economy.
US personal income was flat in November, while personal spending rose by 0.2%, with October’s figure being revised upward.
The S&P/Case-Shiller home price index for 20 US cities rose by 0.6% for the month of October. The index increased by 5.1% year-over-year, compared to 5.0% in September.
The ISM manufacturing index rose to its highest level in two years, rising to 54.7 in December from 53.2 the previous month. New orders and production paced the increase.
US housing starts declined by 250,000 units (annualized) in November to 1.09 million units, with most of the decline coming in the multi-family segment. The decline came after large gains in October with builders ramping up construction after delaying starts in advance of hurricane Matthew. Building permits also declined. US existing homes sales increased by 0.7% to 5.61 million units, annualized, in November. New single-family home sales rose by 5.2% to 592,000 units, annualized, in November. Orders for US durable goods fell by 4.6% in November, due to a drop in aircraft orders, following a robust increase in October. Non-defense capital goods, excluding aircraft, a key indicator of business spending plans, rose by 0.9%. US third quarter GDP was revised upwards to 3.5% from 3.2%, the strongest growth rate since the third quarter of 2014.
Canadian GDP declined by 0.3% in October 2015, ending four months of gains. Canadian retail sales rose by 1.1% in October, the third straight monthly increase. The inflation rate in Canada slowed to 1.2% in November from 1.5% in October.