Everyday, Everyday I Have the Blues
By John Stoltzfus,
Chief Investment Strategist
Trend Analysis
Market Strategy Radar Screen Weekly December 05, 2016
In this article:
- After three weeks of posting gains in celebration of prospects for tax cuts
- fiscal spending and reduced regulation
- stocks reflected nervousness about just how much fiscal stimulus might push inflation up.
Rock Steady
Investor patience required as multiple transitions move ahead
There’s no shortage of action in the markets as 2016 draws closer to year end. Oil, the dollar and the markets’ perception du jour of the effect of stimulus (yet to be even defined or applied) on the economy have bullied the bond market and jostled stocks. We think patience is required of investors in the near term.
As we went to press with this week’s market strategy commentary, news crossed the tape that the Italian electorate had voted against proposed reforms which would have reined in the power of the Italian Senate.
Bloomberg news reported that Italian Prime Minister Matteo Renzi acknowledged defeat in the constitutional referendum that took place and that he would turn in his resignation.
Soon after the news broke, the Euro fell to its lowest level since March of 2015 before paring its losses. The Italian vote marks yet another victory for populist trends that have popped up across the globe victorious in 2016 elections.
The outcome of the Italian election adds an additional level of concern that the global markets will have to ponder and digest.
Stateside last week saw oil prices recover and move higher on the back of an agreement by members of OPEC and other producers including Russia to curtail production to support the price of oil.
As of the close last Friday the price of WTI (West Texas Intermediate) stood at $51.68 bbl. or 12.2% higher than where it had closed on the prior Friday.
The Energy sector of the S&P 500 moved higher last week on the back of the surge in the price of oil with oil stocks rising 2.64% on the week. The sector has advanced 9.42% since November 4.
Stocks traded mixed last week with the blue-chipladen Dow Jones Industrial average edging 0.1% higher on the week while the S&P 500 and the NASDAQ respectively slipped 0.97% and 2.65%.
After three weeks of posting gains in celebration of prospects for tax cuts, fiscal spending and reduced regulation, stocks reflected nervousness about just how much fiscal stimulus might push inflation up. Investors also turned to consider what effect a more aggressive trade policy might have on US multinational trade relationships.
The bond market has taken a drubbing since the election on concerns about the effects of the yet to be defined (let alone implemented) stimulus programs.
Since November 8th the 10-year Treasury note’s yield has jumped 27.6% from 1.86% to close at 2.36% last Friday. The 30-year Treasury bond in the same period saw its yield move 16.7% higher from 2.62% to 3.03% as of last Friday’s close.
Beyond the aforementioned activity and drama the markets appear to be reacting well considering the transitions that are currently taking place.
Consider that the market has also processed so far this quarter:
- Third-quarter earnings results which came in better than expected
- A surprise outcome in the Presidential election
- Continued improvement in economic data, including the latest non-farm payroll and unemployment numbers as well as industrial production and retail sales
- Countless events of Fed speak and guidance related to the process of normalization.
The last in the series of known “main events” for 2016 is just nine days away when the Fed will announce its decision on whether or not it will raise its benchmark rate.
We look for the Fed to raise its benchmark rate by 25 bps on December 14th and have expectations that the stock market will likely respond positively to the Fed’s action. From our perspective 25 bps will be relatively easy for the economy to digest and will also send a message to market participants from the Fed to keep animal spirits in check and expectations right sized.
As to the bond market and the dollar? We continue to believe that the bond market is oversold and the dollar overbought. In such times of transition, perception and projection can often distort sentiment negatively in the short term.
For the complete report, please contact your Oppenheimer Financial Advisor.
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