For a PDF version of the below commentary please click here weekly-letter-12-19-2016
Commentary quick take:
- Major developments:
- US Federal Reserve raised rates
- Markets were mixed last week
- US dollar jumped higher
- US:
- Chair Yellen announced a rate hike of 0.25 percent
- Market reaction was muted
- Bonds continued to feel pressure
- Global:
- All central banks except for Mexico kept rates unchanged last week
- Venezuela is getting out of hand
- Technical market view:
- The three major indexes stayed within their trading channels
- Technical strength is still the strongest on the Dow
- VIX moved slightly higher, but remains very low
- Hybrid investments strategy update:
- Increased financials
- Increased small caps
- Increased Sierra strategic income
- Increased senior loans
- Purchased an Energy mutual fund
- Sold half of Schwab payout funds
- Nearly complete with shifting toward our new investments for 2017
- This week for the markets:
- Interesting Fact: Zsa Zsa Gabor (2/6/1917-12/18/2016)
Major theme of the markets last week: The Fed finally raised rates in 2016
Fed chair Yellen finally achieved a small rate hike during 2016. It only took her nearly 12 months to pull it off and a whole lot of market speculation about whether she could do it or not given the slow rate of growth and low inflation in the US economy. The markets last week took the rate hike in stride as it had already been priced in, thanks to the Fed’s telegraphing of information over the past month. There were, however, some interesting changes made in the Fed’s forecasts, which will be discussed further in the national news section below. Now that the Fed has finally acted, the markets can go about setting up for the end of the year and what appears to be the continued hope that President-Elect Trump will actually be able to follow through with his stimulus measures to boost the US economy.
US news impacting the financial markets:
Last week, the US financial markets finally focused on something other than President-Elect Trump and his grand plans for making America great again. The focus of the market was the US Federal Reserve and the Fed’s last chance to raise rates during 2016. Taking the decision down to the wire, the Fed finally managed to raise rates from a range of 0.25 to 0.5 percent up one quarter of a percent to a range of 0.5 percent to 0.75 percent. The decision to raise the Fed funds rate was unanimous for the first time this year as all members of the FOMC got behind the decision. Much of the statement language from the previous meeting and the December meeting was unchanged, but there were a few key differences. In the reasoning for the hike, Chair Yellen said that “growth is a touch stronger, unemployment is a shade lower,” which was new language for the statement. She did use the standard line, “We expect that the economy will continue to perform well, with the job market strengthening further, and inflation rising to 2% over the next couple of years.” She also made appropriate adjustments to Fed projections, like adding 0.1 percent to GDP projections for 2017, which now stand at 2.1 percent. Interesting enough, she did not adjust the projections for 2018 and only increased 2019 by 0.1 percent. If one is to believe the amount of spending that President-Elect Trump seems to want to pursue, it would be reasonable to think that these projections are far too low and should be adjusted to something more in the 3 to 4 percent GDP growth range. Obviously, the FOMC does not share the same enthusiasm over changes that will boost GDP as the President-Elect. Back to the Fed funds rate, when looking at the dot plot that was provided by the Fed, the path that interest rates will be taking in 2017 and beyond became a little more uncertain.
The dot plot above shows each voting member of the FOMC’s projection for rates over the next few years. You can see a wide dispersion for 2017 and 2018. You can ignore the lowest dot of 2018 and 2019 as it is a Fed official who no longer believes in forecasting the Fed Fund rate and announced that he would not be adjusting his dot. When looking at 2017 alone, the range goes from sub 1 to over 2 percent, with the average number of anticipated hikes during 2017 being three. This is one less hike than was expected for 2016 when we started the year; you may remember that the dot plot was pricing in four hikes this year. In Chair Yellen’s press conference following the announcement on Wednesday, she was even more noncommittal than normal to nearly all of the questions, taking the wait-and-see approach to the incoming administration, but acknowledging that there is “considerable uncertainty” with regard to policy changes that may occur. With the December meeting of the Fed now behind us, the US financial markets can once again get back to focusing on Donald Trump’s Twitter account and projecting year-end holiday sales that could help boost corporate America’s bottom line. One area of previous concern that seems to be waning is manufacturing here in the US as the latest figures on manufacturing came in much stronger than anticipated in the greater New York region as well as the Philadelphia region.
Global news impacting the markets:
The US Federal Reserve was not the only central bank meeting for the last time in 2016 last week as the Bank of England, Swiss National Bank, the Bank of South Korea and the Norges Bank (Norway’s central bank) all held rate-setting meetings, at which they each decided not to change their interest rates at all. There was one central bank meeting that did move on rates aside from the US and that was the central bank of Mexico, which increased its target rate by 0.5 percent up to 5.75 percent. This may have had more to do with its economy being strong enough to take a rate hike now than it may be in 2017 if President-Elect Trump follows through with his threats of building a wall and making Mexico pay for it. Another potentially impactful part of the new administration for Mexico is the push for things to be made in the US again, with the threat of an import tariff being added to goods made or finished in Mexico and then brought into the US to be sold. We have already seen a small impact of these threats on a company’s plans when the Carrier group decided to abandon plans to move a manufacturing plant from Indiana to Mexico, a move that Trump announced very publically. As we move into the end of 2016, global and national financial news typically slows way down as investors and money managers alike finish off their holiday time-off and get ready for the New Year.
Technical market review:
The trading channels (yellow lines below) drawn last week held up over the previous week with each of the three channels being tested by the indexes on the upside early during the week and bouncing lower as the week progressed. Each trading channel on the charts below was drawn based on the rough movements of the markets seen since election night. The red line on the VIX chart remains the 52-week average level of the VIX, which the index is currently solidly below.
In terms of ranking technical strength, not much changed over the past week. The Dow (upper right pane above) remains in the lead as the index has been moving quickly higher since the election of Donald Trump. The S&P 500 (upper left pane above) is currently in second place, while the NASDAQ (lower left) is solidly in third. One thing to note in the above movements is that much of the movements of the indexes have been driven by outsized gains in a relatively small number of sectors in the markets. For example, remove the financial sector from any of the three major indexes and the returns are significantly lower. While the Dow and the S&P 500 look overdone at this point, in terms of having moved higher too quickly, the VIX seems to be supporting the move as legitimate since the index has failed to move higher in any meaningful way since election night. Complacencyin the VIX can change in a hurry, however, as the VIX is known for having spikes in excess of 50 percent over very short periods of time.
Hybrid model performance and update
For the trading week ending on 12/16/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:
| |
Last Week |
2016 YTD |
Since 6/30/2015 |
| Aggressive Model |
-0.72% |
1.08% |
5.43% |
| Aggressive Benchmark |
-0.47% |
5.27% |
-0.09% |
| Growth Model |
-0.42% |
1.22% |
4.61% |
| Growth Benchmark |
-0.37% |
4.27% |
0.21% |
| Moderate Model |
-0.09% |
1.02% |
3.78% |
| Moderate Benchmark |
-0.26% |
3.21% |
0.41% |
| Income Model |
0.14% |
0.98% |
3.62% |
| Income Benchmark |
-0.12% |
1.80% |
0.49% |
| S&P 500 |
-0.06% |
10.48% |
9.45% |
*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.
My rotation toward positions that should benefit from the plans discussed about future spending with the Trump Administration continues. Last week we also saw some bounce back in some of the more beaten down dividend stocks that are still owned in the hybrid models. The movement last week in the hybrid models was comprised primarily of purchases of “next steps” into already existing positions. Financials was added to, as was small cap value stocks, senior loans and the Sierra Strategic income fund. The only selling done last week was selling half of the positions in the Schwab payout funds. The Schwab payout funds are broad based mutual funds that own both fixed income as well as equity positions. The position was sold in order to reduce the overall exposure of the hybrid models to the intermediate and long term bonds, both of which are positions within the Schwab payout funds. Some of the proceeds from the sales went to cash, while some went into positions such as senior loans. The only new purchase of the week last week was an initial position purchased into a US Energy focused mutual fund. The fund provides a wide exposure to the energy industry, which will likely benefit from loosened regulations from the EPA under Trump as well as higher oil prices, which have been elevated by OPEC over the past several weeks. Currently, we are nearly set up with the new positions that need to be purchased for moving into 2017.
Market Statistics:
Last week the rally continued for the Dow as it pushed ever closer to 20,000, but the other two indexes failed to stay above water, posting losses for the week:
| Index |
Change |
Volume |
| Dow |
0.44% |
Above Average |
| S&P 500 |
-0.06% |
Above Average |
| NASDAQ |
-0.13% |
Above Average |
With last week being a major Fed meeting week and there being a rate hike, it was a little surprising to see that the markets really took the change in stride. Volume on a weekly basis was higher than it has been on average over the past year, but other than that, it would be difficult to guess that the Fed raised rates during the week when looking at the numbers.
The following were the top 5 and bottom 5 performers over the course of the previous week:
| Top 5 Sectors |
Change |
|
Bottom 5 Sectors |
Change |
| Pharmaceuticals |
2.45% |
|
Aerospace & Defense |
-2.36% |
| Utilities |
1.73% |
|
Transportation |
-2.45% |
| Healthcare |
1.65% |
|
Home Construction |
-2.85% |
| Biotechnology |
1.02% |
|
International Real Estate |
-3.45% |
| Infrastructure |
1.00% |
|
Materials |
-3.52% |
The top five performing sectors of the market last week are a little confusing as two are considered lower risk sectors, while the other three are much higher risk sectors of the markets. Pharmaceuticals, Biotechnology and Healthcare all moved higher last week in what looked like a snap back rally after the losses experienced two weeks ago on President-Elect Trump’s comments about drug prices. There were also a few drug approvals by the FDA last week that helped to boost the sector. Utilities is one of the confusing sector moves last week; conventional thought is that when interest rates are moving higher, Utilities are at risk of being pushed lower as they are typically held for no reason other than being a bond proxy. Infrastructure is the other odd positive moving sector last week as it, too, is historically interest rate sensitive and goes down when rates go up. The bottom 5 performing sectors are a smattering of sectors that moved lower, predominantly due to news about the specific sector. For instance, Home Construction took a hit on Friday after the announcement of weaker than expected housing starts during the month of November. Aerospace and Defense took a hit last week, thanks to continued comments from President-Elect Trump over the cost of the F-35 fighter jet. One concerning sector that made the bottom 5 sectors last week is Transportation, as this sector touches many other sectors and is typically seen as an early indicator of trouble ahead for the US economy. We will have to wait and see if this downtick develops into a trend or if it is just a blip on the map.
Fixed income markets here in the US had a much better week than the previous time the Fed raised rates as the movement was almost tame. It was a little surprising to see that the largest losses in the fixed income market last week occurred in the middle of the curve rather than on the long end of the curve. We also saw a flattening of the yield curve overall as the short end actually went up, while the long went down. This was probably the goal of the Fed when looking at the fixed income market and the action it took:
| Fixed Income |
Change |
| Long (20+ years) |
-0.31% |
| Middle (7-10 years) |
-0.91% |
| Short (less than 1 year) |
0.05% |
| TIPS |
-1.52% |
Global currency trading volume was above average last week, despite traders knowing that there was a high probability of the Fed raising rates at the meeting. Overall, the US dollar advanced 1.26 percent against a basket of international currencies. The best performing of the global currencies last week was the Macau Pataca, which gained 1.65 percent against the US dollar, thanks to changes in the gambling laws of Macau that went into effect last week. The worst performance among the global currencies was seen in the Chile Peso, as it declined by 3.26 percent against the value of the US dollar. I was surprised the Venezuelan currency did not take the bottom spot after the changes last week that sunk its financial market.
Commodities were mixed last week as oil moved higher, while the metals all pushed lower:
| Metals |
Change |
|
Commodities |
Change |
| Gold |
-2.13% |
|
Oil |
0.96% |
| Silver |
-4.38% |
|
Livestock |
4.94% |
| Copper |
-4.12% |
|
Grains |
-0.34% |
| |
|
|
Agriculture |
1.72% |
The overall Goldman Sachs Commodity Index gained 0.32 percent last week, with much of the gains coming from soft commodities. Oil advanced less than 1 percent, gaining 0.96 percent as the OPEC deal still seems to be holding up, although we have yet to see any production numbers from the group since the announcement. All of the metals continued to slide last week as Gold declined 2.13 percent, while Silver dove 4.38 percent and the more industrially used Copper pushed lower by 4.12 percent. The safe haven assets were not pushed up after the rate hike, as has previously occurred. Soft commodities were mixed last week, with Agriculture overall gaining 1.72 percent, while Livestock jumped 4.94 percent and Grains posted losses of 0.34 percent.
| Top 2 Indexes |
Country |
Change |
|
Bottom 2 Indexes |
Country |
Change |
| BUX |
Hungary |
4.21% |
|
Dow Jones China 88 |
China |
-4.80% |
| FTSE MIB |
Italy |
3.95% |
|
Caracas General |
Venezuela |
-17.26% |
Last week was a mixed week in term of global financial markets as 53 percent of the markets posted gains. The best performing index last week was found in Hungary and was the BUX index, which turned in a gain of 4.21 percent for the week. The worst performing index for the second week in a row was found in Venezuela and was the Caracas General Index, which turned in a loss of 17.26 percent. The government in Venezuela took a very interesting step last week when it announced that the largest paper bill widely circulated, the 100 Bolivar bill, was no longer legal tender and that it was being replaced with a new 500 Bolivar bill. The problem was that the government didn’t have any of the new bills on hand to exchange for people, so long lines started at banks to exchange old bills for new bills that were not there. Chaos ensued as businesses stopped taking the old bills and no one knew what to do. In true Hugo Chavez fashion, the President of Venezuela blamed the new bills not arriving on foreign governments holding up the shipment of the new bills. In reality, this is just what happens to a command and control economy where inflation is running at greater than 1,500 percent.
After declining by more than 17 percent two weeks ago, the VIX turned in a tame week last week, gaining 3.83 percent. This week we see the VIX 30-day contract finally cover inauguration day here in the US as it will be less than 30 days away, so we could see a little more movement than we have been seeing the past few weeks. We are very near the lowest points that we have seen on the VIX over the past year, so having it move a little higher is probably just a normal course of action. The current reading of 12.2 implies that a move of 3.52 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown.
Economic Release Calendar:
Last week was a busy week for economic news releases, as more than just the statement by the Fed was released:
| Economic Impact |
Date |
Economic News Release |
Date Range |
Actual |
Expectation |
| Negative |
12/14/2016 |
Retail Sales |
November 2016 |
0.10% |
0.30% |
| Slightly Negative |
12/14/2016 |
Retail Sales ex-auto |
November 2016 |
0.20% |
0.40% |
| Neutral |
12/14/2016 |
PPI |
November 2016 |
0.40% |
0.10% |
| Neutral |
12/14/2016 |
Core PPI |
November 2016 |
0.40% |
0.20% |
| Neutral |
12/14/2016 |
FOMC Rate Decision |
December 2016 |
0.63% |
0.63% |
| Neutral |
12/15/2016 |
CPI |
November 2016 |
0.20% |
0.20% |
| Neutral |
12/15/2016 |
Core CPI |
November 2016 |
0.20% |
0.20% |
| Positive |
12/15/2016 |
Philadelphia Fed |
December 2016 |
21.5 |
9 |
| Positive |
12/15/2016 |
Empire Manufacturing |
December 2016 |
9 |
3 |
| Slightly Negative |
12/16/2016 |
Housing Starts |
November 2016 |
1090K |
1225K |
| Neutral |
12/16/2016 |
Building Permits |
November 2016 |
1201K |
1236K |
Data for table from Econoday.com, Bloomberg and Yahoo Finance
Last week, the economic news releases started on Wednesday with the release of retail sales for the month of November, which missed expectations, both when looking at overall sales and sales excluding auto sales. This was a curious release as all of the sentiment indicators for the same time period showed increasing confidence about the economy, which should have translated into higher retail sales. Also released on Wednesday was the Producer Price Index (PPI), both overall and core for the month of November, with both figures coming in slightly higher than anticipated, thanks in large part to the increase in the price of energy that occurred during the month. The big release of the day on Wednesday, however, was the FED’s rate decision, which was discussed in further detail above. On Thursday, the Consumer Price Index (CPI), both overall and core, showed very low inflation being seen in the US economy. The two manufacturing related releases of the week were also released on Thursday with the Philadelphia Fed index handedly beating market expectations, coming in at 21.5 while the markets had been expecting a reading of only 9. The Empire Manufacturing index also handedly beat the expected 3 reading by posting a reading of 9. Both of these figures showed strong results during November for manufacturing here in the US and hopefully the start of a sustained uptrend and not just a temporary uptick. On Friday, the first of the housing related information for the month of November was released with housing starts and building permits, both of which missed market expectations and had a negative impact on the US home construction sector.
This week is a typical week for economic news released, with several releases that could impact the overall movement of the US markets:
| Date |
Release |
Release Range |
Market Expectation |
| 12/21/2016 |
Existing Home Sales |
November 2016 |
5.50M |
| 12/22/2016 |
GDP – Third Estimate |
Q3 2016 |
3.30% |
| 12/22/2016 |
Durable Orders |
November 2016 |
-4.50% |
| 12/22/2016 |
Durable Orders, Ex- Transportation |
November 2016 |
0.20% |
| 12/22/2016 |
Personal Income |
November 2016 |
0.30% |
| 12/22/2016 |
Personal Spending |
November 2016 |
0.40% |
| 12/23/2016 |
University of Michigan Consumer Sentiment |
December 2016 |
98.2 |
| 12/23/2016 |
New Home Sales |
November 2016 |
573K |
Data for table from Econoday.com, Bloomberg and Yahoo Finance
This week the economic news releases start on Wednesday with the release of existing home sales for the month of November, which, if they are anything like the two housing data points last week, could slightly disappoint the markets. On Thursday, the big releases of the week are released with the third estimate of third quarter 2016 GDP being the potentially most impactful release of the day. Expectations are for no change from the second estimate of 3.3 percent, but no change on the third revision is very rare. Normally it is an adjustment of a few tenths of a percent in either direction. If it is a downward revision, the markets have historically increased as that meant that the likelihood of the Fed being able to raise rates diminished. Durable goods orders for the month of November are also set to be released on Thursday, but expectations for these releases are not very good as overall orders are expected to post a decline of 4.5 percent, with much of that decline being attributed to a decline in airplane orders. Excluding transportation, durable goods orders are expected to post a meager gain of 0.2 percent during the month of November, which is far lower than it should be given the high level of consumer confidence, according to the sentiment indexes. Rounding out the day on Thursday is the release of personal income and spending for November, both of which are expected to show small gains during the month. On Friday the University of Michigan’s Consumer Sentiment index for the month of December (as of the end of November) is set to be released with the expectation of little change over the level seen in the middle of November. Wrapping up the week this week is the release of the existing home sales figure for the month of November, which is expected to be slightly better in November than it was in October, but still pretty lack luster. In addition to the scheduled economic news releases, there is only one single Fed official making a speech, but it is Chair Yellen on Monday, so the markets could pay attention to what she says, though it is highly unlikely that anything would have changed in her thinking between last week’s statement and press conference and this week’s speech.
Interesting Fact — The fascinating life of Zsa Zsa Gabor
With Zsa Zsa Gabor’s passing yesterday, there was bound to be many interesting facts resurfacing about her life. Here are some of the more entertaining ones:
Zsa Zsa gabor was married 9 times, including to Conrad Hilton her second husband. Commenting on her 9 marriages, she said, “I am a marvelous housekeeper: Every time I leave a man I keep his house.”
Gabor and her last husband Frédéric Prinz von Anhalt adopted at least ten adult males who paid them a fee of up to $2,000,000 to become descendants by adoption of Princess Marie-Auguste of Anhalt.
Gabor appeared in 29 movies and nearly 40 TV series.
Source: earnthenecklace.com
Have a great week!
Peter Johnson
Peter's Stock Market Blog
Financial Market Commentary December 19th 2016
December 19, 2016
For a PDF version of the below commentary please click here weekly-letter-12-19-2016
Commentary quick take:
Major theme of the markets last week: The Fed finally raised rates in 2016
Fed chair Yellen finally achieved a small rate hike during 2016. It only took her nearly 12 months to pull it off and a whole lot of market speculation about whether she could do it or not given the slow rate of growth and low inflation in the US economy. The markets last week took the rate hike in stride as it had already been priced in, thanks to the Fed’s telegraphing of information over the past month. There were, however, some interesting changes made in the Fed’s forecasts, which will be discussed further in the national news section below. Now that the Fed has finally acted, the markets can go about setting up for the end of the year and what appears to be the continued hope that President-Elect Trump will actually be able to follow through with his stimulus measures to boost the US economy.
US news impacting the financial markets:
Last week, the US financial markets finally focused on something other than President-Elect Trump and his grand plans for making America great again. The focus of the market was the US Federal Reserve and the Fed’s last chance to raise rates during 2016. Taking the decision down to the wire, the Fed finally managed to raise rates from a range of 0.25 to 0.5 percent up one quarter of a percent to a range of 0.5 percent to 0.75 percent. The decision to raise the Fed funds rate was unanimous for the first time this year as all members of the FOMC got behind the decision. Much of the statement language from the previous meeting and the December meeting was unchanged, but there were a few key differences. In the reasoning for the hike, Chair Yellen said that “growth is a touch stronger, unemployment is a shade lower,” which was new language for the statement. She did use the standard line, “We expect that the economy will continue to perform well, with the job market strengthening further, and inflation rising to 2% over the next couple of years.” She also made appropriate adjustments to Fed projections, like adding 0.1 percent to GDP projections for 2017, which now stand at 2.1 percent. Interesting enough, she did not adjust the projections for 2018 and only increased 2019 by 0.1 percent. If one is to believe the amount of spending that President-Elect Trump seems to want to pursue, it would be reasonable to think that these projections are far too low and should be adjusted to something more in the 3 to 4 percent GDP growth range. Obviously, the FOMC does not share the same enthusiasm over changes that will boost GDP as the President-Elect. Back to the Fed funds rate, when looking at the dot plot that was provided by the Fed, the path that interest rates will be taking in 2017 and beyond became a little more uncertain.
The dot plot above shows each voting member of the FOMC’s projection for rates over the next few years. You can see a wide dispersion for 2017 and 2018. You can ignore the lowest dot of 2018 and 2019 as it is a Fed official who no longer believes in forecasting the Fed Fund rate and announced that he would not be adjusting his dot. When looking at 2017 alone, the range goes from sub 1 to over 2 percent, with the average number of anticipated hikes during 2017 being three. This is one less hike than was expected for 2016 when we started the year; you may remember that the dot plot was pricing in four hikes this year. In Chair Yellen’s press conference following the announcement on Wednesday, she was even more noncommittal than normal to nearly all of the questions, taking the wait-and-see approach to the incoming administration, but acknowledging that there is “considerable uncertainty” with regard to policy changes that may occur. With the December meeting of the Fed now behind us, the US financial markets can once again get back to focusing on Donald Trump’s Twitter account and projecting year-end holiday sales that could help boost corporate America’s bottom line. One area of previous concern that seems to be waning is manufacturing here in the US as the latest figures on manufacturing came in much stronger than anticipated in the greater New York region as well as the Philadelphia region.
Global news impacting the markets:
The US Federal Reserve was not the only central bank meeting for the last time in 2016 last week as the Bank of England, Swiss National Bank, the Bank of South Korea and the Norges Bank (Norway’s central bank) all held rate-setting meetings, at which they each decided not to change their interest rates at all. There was one central bank meeting that did move on rates aside from the US and that was the central bank of Mexico, which increased its target rate by 0.5 percent up to 5.75 percent. This may have had more to do with its economy being strong enough to take a rate hike now than it may be in 2017 if President-Elect Trump follows through with his threats of building a wall and making Mexico pay for it. Another potentially impactful part of the new administration for Mexico is the push for things to be made in the US again, with the threat of an import tariff being added to goods made or finished in Mexico and then brought into the US to be sold. We have already seen a small impact of these threats on a company’s plans when the Carrier group decided to abandon plans to move a manufacturing plant from Indiana to Mexico, a move that Trump announced very publically. As we move into the end of 2016, global and national financial news typically slows way down as investors and money managers alike finish off their holiday time-off and get ready for the New Year.
Technical market review:
The trading channels (yellow lines below) drawn last week held up over the previous week with each of the three channels being tested by the indexes on the upside early during the week and bouncing lower as the week progressed. Each trading channel on the charts below was drawn based on the rough movements of the markets seen since election night. The red line on the VIX chart remains the 52-week average level of the VIX, which the index is currently solidly below.
In terms of ranking technical strength, not much changed over the past week. The Dow (upper right pane above) remains in the lead as the index has been moving quickly higher since the election of Donald Trump. The S&P 500 (upper left pane above) is currently in second place, while the NASDAQ (lower left) is solidly in third. One thing to note in the above movements is that much of the movements of the indexes have been driven by outsized gains in a relatively small number of sectors in the markets. For example, remove the financial sector from any of the three major indexes and the returns are significantly lower. While the Dow and the S&P 500 look overdone at this point, in terms of having moved higher too quickly, the VIX seems to be supporting the move as legitimate since the index has failed to move higher in any meaningful way since election night. Complacencyin the VIX can change in a hurry, however, as the VIX is known for having spikes in excess of 50 percent over very short periods of time.
Hybrid model performance and update
For the trading week ending on 12/16/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:
*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.
My rotation toward positions that should benefit from the plans discussed about future spending with the Trump Administration continues. Last week we also saw some bounce back in some of the more beaten down dividend stocks that are still owned in the hybrid models. The movement last week in the hybrid models was comprised primarily of purchases of “next steps” into already existing positions. Financials was added to, as was small cap value stocks, senior loans and the Sierra Strategic income fund. The only selling done last week was selling half of the positions in the Schwab payout funds. The Schwab payout funds are broad based mutual funds that own both fixed income as well as equity positions. The position was sold in order to reduce the overall exposure of the hybrid models to the intermediate and long term bonds, both of which are positions within the Schwab payout funds. Some of the proceeds from the sales went to cash, while some went into positions such as senior loans. The only new purchase of the week last week was an initial position purchased into a US Energy focused mutual fund. The fund provides a wide exposure to the energy industry, which will likely benefit from loosened regulations from the EPA under Trump as well as higher oil prices, which have been elevated by OPEC over the past several weeks. Currently, we are nearly set up with the new positions that need to be purchased for moving into 2017.
Market Statistics:
Last week the rally continued for the Dow as it pushed ever closer to 20,000, but the other two indexes failed to stay above water, posting losses for the week:
With last week being a major Fed meeting week and there being a rate hike, it was a little surprising to see that the markets really took the change in stride. Volume on a weekly basis was higher than it has been on average over the past year, but other than that, it would be difficult to guess that the Fed raised rates during the week when looking at the numbers.
The following were the top 5 and bottom 5 performers over the course of the previous week:
The top five performing sectors of the market last week are a little confusing as two are considered lower risk sectors, while the other three are much higher risk sectors of the markets. Pharmaceuticals, Biotechnology and Healthcare all moved higher last week in what looked like a snap back rally after the losses experienced two weeks ago on President-Elect Trump’s comments about drug prices. There were also a few drug approvals by the FDA last week that helped to boost the sector. Utilities is one of the confusing sector moves last week; conventional thought is that when interest rates are moving higher, Utilities are at risk of being pushed lower as they are typically held for no reason other than being a bond proxy. Infrastructure is the other odd positive moving sector last week as it, too, is historically interest rate sensitive and goes down when rates go up. The bottom 5 performing sectors are a smattering of sectors that moved lower, predominantly due to news about the specific sector. For instance, Home Construction took a hit on Friday after the announcement of weaker than expected housing starts during the month of November. Aerospace and Defense took a hit last week, thanks to continued comments from President-Elect Trump over the cost of the F-35 fighter jet. One concerning sector that made the bottom 5 sectors last week is Transportation, as this sector touches many other sectors and is typically seen as an early indicator of trouble ahead for the US economy. We will have to wait and see if this downtick develops into a trend or if it is just a blip on the map.
Fixed income markets here in the US had a much better week than the previous time the Fed raised rates as the movement was almost tame. It was a little surprising to see that the largest losses in the fixed income market last week occurred in the middle of the curve rather than on the long end of the curve. We also saw a flattening of the yield curve overall as the short end actually went up, while the long went down. This was probably the goal of the Fed when looking at the fixed income market and the action it took:
Global currency trading volume was above average last week, despite traders knowing that there was a high probability of the Fed raising rates at the meeting. Overall, the US dollar advanced 1.26 percent against a basket of international currencies. The best performing of the global currencies last week was the Macau Pataca, which gained 1.65 percent against the US dollar, thanks to changes in the gambling laws of Macau that went into effect last week. The worst performance among the global currencies was seen in the Chile Peso, as it declined by 3.26 percent against the value of the US dollar. I was surprised the Venezuelan currency did not take the bottom spot after the changes last week that sunk its financial market.
Commodities were mixed last week as oil moved higher, while the metals all pushed lower:
The overall Goldman Sachs Commodity Index gained 0.32 percent last week, with much of the gains coming from soft commodities. Oil advanced less than 1 percent, gaining 0.96 percent as the OPEC deal still seems to be holding up, although we have yet to see any production numbers from the group since the announcement. All of the metals continued to slide last week as Gold declined 2.13 percent, while Silver dove 4.38 percent and the more industrially used Copper pushed lower by 4.12 percent. The safe haven assets were not pushed up after the rate hike, as has previously occurred. Soft commodities were mixed last week, with Agriculture overall gaining 1.72 percent, while Livestock jumped 4.94 percent and Grains posted losses of 0.34 percent.
Last week was a mixed week in term of global financial markets as 53 percent of the markets posted gains. The best performing index last week was found in Hungary and was the BUX index, which turned in a gain of 4.21 percent for the week. The worst performing index for the second week in a row was found in Venezuela and was the Caracas General Index, which turned in a loss of 17.26 percent. The government in Venezuela took a very interesting step last week when it announced that the largest paper bill widely circulated, the 100 Bolivar bill, was no longer legal tender and that it was being replaced with a new 500 Bolivar bill. The problem was that the government didn’t have any of the new bills on hand to exchange for people, so long lines started at banks to exchange old bills for new bills that were not there. Chaos ensued as businesses stopped taking the old bills and no one knew what to do. In true Hugo Chavez fashion, the President of Venezuela blamed the new bills not arriving on foreign governments holding up the shipment of the new bills. In reality, this is just what happens to a command and control economy where inflation is running at greater than 1,500 percent.
After declining by more than 17 percent two weeks ago, the VIX turned in a tame week last week, gaining 3.83 percent. This week we see the VIX 30-day contract finally cover inauguration day here in the US as it will be less than 30 days away, so we could see a little more movement than we have been seeing the past few weeks. We are very near the lowest points that we have seen on the VIX over the past year, so having it move a little higher is probably just a normal course of action. The current reading of 12.2 implies that a move of 3.52 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown.
Economic Release Calendar:
Last week was a busy week for economic news releases, as more than just the statement by the Fed was released:
Data for table from Econoday.com, Bloomberg and Yahoo Finance
Last week, the economic news releases started on Wednesday with the release of retail sales for the month of November, which missed expectations, both when looking at overall sales and sales excluding auto sales. This was a curious release as all of the sentiment indicators for the same time period showed increasing confidence about the economy, which should have translated into higher retail sales. Also released on Wednesday was the Producer Price Index (PPI), both overall and core for the month of November, with both figures coming in slightly higher than anticipated, thanks in large part to the increase in the price of energy that occurred during the month. The big release of the day on Wednesday, however, was the FED’s rate decision, which was discussed in further detail above. On Thursday, the Consumer Price Index (CPI), both overall and core, showed very low inflation being seen in the US economy. The two manufacturing related releases of the week were also released on Thursday with the Philadelphia Fed index handedly beating market expectations, coming in at 21.5 while the markets had been expecting a reading of only 9. The Empire Manufacturing index also handedly beat the expected 3 reading by posting a reading of 9. Both of these figures showed strong results during November for manufacturing here in the US and hopefully the start of a sustained uptrend and not just a temporary uptick. On Friday, the first of the housing related information for the month of November was released with housing starts and building permits, both of which missed market expectations and had a negative impact on the US home construction sector.
This week is a typical week for economic news released, with several releases that could impact the overall movement of the US markets:
Data for table from Econoday.com, Bloomberg and Yahoo Finance
This week the economic news releases start on Wednesday with the release of existing home sales for the month of November, which, if they are anything like the two housing data points last week, could slightly disappoint the markets. On Thursday, the big releases of the week are released with the third estimate of third quarter 2016 GDP being the potentially most impactful release of the day. Expectations are for no change from the second estimate of 3.3 percent, but no change on the third revision is very rare. Normally it is an adjustment of a few tenths of a percent in either direction. If it is a downward revision, the markets have historically increased as that meant that the likelihood of the Fed being able to raise rates diminished. Durable goods orders for the month of November are also set to be released on Thursday, but expectations for these releases are not very good as overall orders are expected to post a decline of 4.5 percent, with much of that decline being attributed to a decline in airplane orders. Excluding transportation, durable goods orders are expected to post a meager gain of 0.2 percent during the month of November, which is far lower than it should be given the high level of consumer confidence, according to the sentiment indexes. Rounding out the day on Thursday is the release of personal income and spending for November, both of which are expected to show small gains during the month. On Friday the University of Michigan’s Consumer Sentiment index for the month of December (as of the end of November) is set to be released with the expectation of little change over the level seen in the middle of November. Wrapping up the week this week is the release of the existing home sales figure for the month of November, which is expected to be slightly better in November than it was in October, but still pretty lack luster. In addition to the scheduled economic news releases, there is only one single Fed official making a speech, but it is Chair Yellen on Monday, so the markets could pay attention to what she says, though it is highly unlikely that anything would have changed in her thinking between last week’s statement and press conference and this week’s speech.
Interesting Fact — The fascinating life of Zsa Zsa Gabor
With Zsa Zsa Gabor’s passing yesterday, there was bound to be many interesting facts resurfacing about her life. Here are some of the more entertaining ones:
Zsa Zsa gabor was married 9 times, including to Conrad Hilton her second husband. Commenting on her 9 marriages, she said, “I am a marvelous housekeeper: Every time I leave a man I keep his house.”
Gabor and her last husband Frédéric Prinz von Anhalt adopted at least ten adult males who paid them a fee of up to $2,000,000 to become descendants by adoption of Princess Marie-Auguste of Anhalt.
Gabor appeared in 29 movies and nearly 40 TV series.
Source: earnthenecklace.com
Have a great week!
Peter Johnson
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