Market Strategy Radar Screen Weekly October 10, 2016

  History May Not Repeat Itself, But It Often Rhymes

The words of the great American author Mark Twain come in handy as our mantra in the days leading to the Presidential election in November and a likely Fed rate hike in December.

What ensued back then came to be known as the “taper tantrum”—before it was over, the 10-year Treasury saw its yield moved from around 1.63% in early May 2013 to a high of 3.03% by that year’s end on the market’s concern that the Fed had fallen behind the curve, misjudged inflation, and likely would be forced to hike its benchmark rate significantly within a short period of time causing market dislocations.

Ironically, the sizable jostling in bond prices didn’t spread to the stock market in 2013.

As bonds sold off, the yield on the 10-year Treasury jumped nearly 140 bps while the stock market moved sharply higher rising over 16% from the start of May through the end of that year, contributing significantly to the price of the S&P 500 which rose over 29% from the start of 2013 to the last trading day of that year.

Further irony was realized as the bond market rallied in 2014 on investor concerns that the economy was slowing and that a recession might be in the cards. Such was and such are the day to day machinations that can bounce markets between gains and losses and cause agita among market participants.

Last week saw a mix of worry about Fed policy; the outcome of the upcoming Presidential election, as well as anticipation of the start of Q3 earnings season (begins unofficially when Alcoa (AA) reports after market close on October 11).

Bond yields edged higher with the yield on the US 10-year Treasury rising 7.76% to 1.72% on the week.

The price of gold fell 4.5% as the dollar strengthened 1.22% vs. the DXY currency basket, while the price of oil moved higher as West Texas Intermediate rose 3.25% on a drop in inventories even as prospects for OPEC’s ability to hold the line on its members’ production rates seemed less assured when it next meets in November.

Stocks stateside lost ground last week as the S&P 500, the Dow Jones Industrial Average, the NASDAQ, the S&P 400 (mid-caps) and the Russell 2000 (small-caps) moved lower last week shedding respectively 0.67%, 0.37%, 0.37%, 1.18%, and 1.21%.

The rotation out of defensive S&P 500 “bond proxy” sectors which was pronounced and a hallmark of the third quarter continued into last week.

Ten of the 11 sectors of the S&P 500 lost ground last week with only Financials rising (+1.52%) on expectations that interest rates will continue to move higher.

Utilities, Telecom and REITs were the bottom three performing sectors of the S&P 500 last week respectively declining 3.81%, 3.84% and 5.26%.

Last week’s economic data was supportive of the view that the economy continues to grow at a sustainable if modest pace. The ISM manufacturing data saw a rebound in manufacturing as well as a rise in the service sector.

The weekly initial jobless claims, the unemployment number (rose to 5% from 4.9% attributable to an increase in the participation rate), the underemployment number steady at 9.7%, as well as the non-farm payroll number (at 156,000 just short of 172,000 expected in a Bloomberg economist survey) pointed to further improvement in the jobs space even as wage growth edged only slightly higher (average hourly earnings up 2.6% y-o-y).

This week along with the start of earnings season the market will focus on:

The JOLTS (Labor Department’s Jobs Openings) and the FOMC Minutes on Tuesday followed by Import Prices on Wednesday, Initial Jobless claims and Retail Sales on Thursday with the Producer Price Index and University of Michigan Consumer Confidence survey on Friday.

From a perspective of the Presidential election Monday will also offer time to consider the outcome of Sunday’s Presidential debate and its implications for Election Day in November.

For the complete report, please contact your Oppenheimer Financial Advisor.

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