by Pinchas Cohen
The Week—And Year—That Was
As traders and investors coast toward what is expected to be an exceptionally cheery holiday season, stuffed with potential fat year-end bonuses and extraordinary market profits, many may take a breather before assessing their market prospects for the coming year. To help with those assessments, here's a brief take on the week, and year, that was.
What will 2017 be remembered for? The dizzying string of record-breaking US market advances, providing the best gains in four years? The lowest unemployment in decades? First monetary tightening in a decade? And if the Republican tilting-Congress and US President have their drothers, the most sweeping tax overhaul in decades? Or will 2017 be remembered as the year cryptocurrencies gained legitimacy as a global financial asset? We believe it's all of the above.
From a shorter-term perspective, in the past week, stocks extended a rally in what is considered the second oldest bull market on record, registering additional highs.
Dow Jones Industrials
The Dow Jones Industrial Average rose 1.35 for the week, hitting 4 records across 5 trading days, on Monday, Tuesday, Wednesday and Friday. The Blue Chip Index made its 68th record for the year on Friday. It's up 24.78 percent for 2017 so far.
S&P 500
The S&P 500 Index advanced 0.92 percent for the week, posting 3 records across 5 trading days, on Monday, Tuesday and Friday. The selloffs on Tuesday and Wednesday erased advances made on Monday and Wednesday. Only Friday’s gains survived, but on the final trading day of the week the index advanced 0.90 percent, the lion's share of the weekly 0.92 upmove. While the Dow's weekly gain was broader, the S&P 500’s Friday advance outperformed the Dow's 0.59, Friday upleg. As well, the US's leading index posted its 61st record for the year to close the week, for a YTD rally of 19.52 percent during 2017 so far.
S&P 500 Sectors
Internally, all the S&P 500 Index sectors were in the green on Friday, with a minimum gain of 0.58 for Energy, while the biggest advance was seen in Consumer Staples, with 1.85 percent. While a defensive sector led the rally, the not-too-distant second was the growth sector that expanded the most this year, Technology, with a 1.52 percent rise on the week. In fact, except for Energy and Consumer Discretionary with 0.78 percent, all sectors moved higher with a minimum of 1.00 percent gains.
Obviously then, it was a strong rally for both defensive as well as growth stocks. On a weekly basis, growth stocks outperformed, led by Technology shares with 1.51 percent, while in a mirror-image, defensive Utilities dropped 1.52 percent for the week.
NASDAQ Composite
The NASDAQ jumped 1.43 percent last week, hitting its first record since November 28 on Friday, advancing 1.15 percent. It has hit more record closes this year than it ever has before according to LPL Financial. In total the tech-heavy index has made 70 new highs in 2017, topping records set in 1980 and 1999. The index gained 29 percent this year so far, its best annual performance since gaining 38 percent over 2013 and performing better than it has over the past 3 years combined (+ 11.80 percent in 2014; +6.04 percent in 2015; +7.41 percent in 2016 for a three-year total of 25.25 percent). This past year also represented its sixth consecutive year of gains – the longest winning streak for the index since the one that ended in 1981.
Russell 2000
The Russell 2000, while advancing 1.39 percent on Friday, gained only 0.48 percent for the week, forming a High-Wave candle, following a Bearish Engulfing Pattern. The small cap index has the fewest records, with 23 so far this year, among all US major indices.
It's up 12.5 percent so far this year, paring 14.82 percent gains during the past week and 13.63 percent from the prior week’s closing price. Of the annual 12.5 percent gain, more than half—6.4 percent —occurred during September alone. That's the result of two major obstacles to US President Donald Trump's tax reform agenda being cleared during September: On the 19th Senate Republicans abandoned a key fiscal doctrine, to agree to a budget that would not add to the federal deficit, in order to pave the way for a $1.5 trillion tax cut over the next decade, which then allowed Congressional Republicans to embrace the massive tax cut; subsequently, on September 27, Trump finally revealed the details of his tax policy.
The plan included the most sweeping tax overhaul in decades and the President promised it would be the biggest tax cut in history. The Russell 2000 jumped 2.00 that day. Still, it is strange that the index whose listed companies are considered to be the biggest beneficiaries of tax cuts has preformed poorly recently and indeed was the worst performer during the past week. Moreover, the tech-heavy NASDAQ, which includes tech firms considered to be left out of the tax reform benefits since they are already paying a lower effective tax rate, climbed Friday by significantly more than the Russell 2000.
Tax Reform Recalibrates Sector Rotation
As the impending tax reform legislation heated up, investors began rotating out of technology shares and into financials. Since September, when tax reform became a real possibility, financials—which, as we've discussed numerous times—have the most to gain, have outperformed all other sectors, by 12.27 percent, while technology shares added only 9.91 percent. Over the same period, the S&P 500 gained 'just' 7.02 percent.
In the past month, Financials outperformed, advancing 6.23 percent, almost tripling Tech stock gains which were up 2.67 percent. During this same time the SPX itself almost doubled technology's performance, +4.34 percent. Along with tax reform helping boost Financials, the Tech sector's jaw-dropping 33.50 YTD performance, which was almost double Financials’ 19.61 percent, made the sector ripe for a correction. Of interest, thus far in 2017, the Financial sector's YTD gains are almost identical to the S&P 500’s 19.52 percent.
Fed Turns Back Market Calibration
The Fed’s third quarter point rate hike for the year this past Wednesday was universally expected. However, the central bank's maintaining its rate outlook for 2018, an additional three hikes and no more, disappointed investors who were hoping for a faster path to higher interest rates, which would have matched the Fed’s improved outlook for economic growth. Investors sold out of Financials, backpeddling into Tech. While technology shares led the benchmark with a weekly 1.51 percent gain, financial firms retreated 0.81 percent.
ECB’s Improved Growth Outlook
The European Central Bank kept its key lending rates and its bond-buying program unchanged at its December meeting this past Thursday, but raised its growth and inflation forecasts through 2020. Government bonds in the eurozone saw modest price declines following the news. For the week, the German 10-year bund yield was little changed. According to Reuters, however, the additional yield offered by the U.S. Treasury 10-year note versus the bund neared its widest level since April. Italian government bonds sold off on political uncertainty after Italy set March 4, 2018, as the date for its general election.
BoE Maintains Rate; Inflation Hits Highest in 5 Years
After raising its bank lending rate for the first time in 10 years in November, the Bank of England (BoE) kept its bank rate unchanged at 0.50% at its December meeting on Thursday. UK inflation rose at an annual rate of 3.1% in November, higher than expected and the fastest pace in more than five years, but the bank’s policymakers noted in their statement that they believe inflation “is likely to be close to its peak” and will return to the BoE’s 2% target. In the meeting minutes, the central bank also noted the recent progress on Brexit negotiations, saying the chance of a disorderly exit from the European Union has decreased. Yields of UK government bonds declined.
China's Last Word: Monetary Policy Foreshadows Market Declines
China has been tightening its massive monetary machine since late 2016. A batch of recent economic data show that China’s growth slowed last month. Further tightening by its central bank, the PBoC, could mean the second largest global economy might be entering the slowdown investors were expecting a year ago, after this year's shockingly unexpected strong performance.
As the world’s biggest commodity purchaser and user, the latest commodity selloff was spurred by these recent reports which signal a Chinese cool down. And of course, falling commodities drag down commodity producer shares, further hampering markets worldwide. A sharp slowdown could ultimately trigger a global stock crash.
Cryptocurrencies Become Legit
A special mention should go to cryptocurrencies in general, and Bitcoin in particular. What started as a gimmick at best, or perhaps a tool for money launderers and criminal syndicates at worst, has become a fully legitimate asset class with the start of Bitcoin Futures trading on the CBOE, and this coming week when the largest options exchange worldwide, the Chicago Mercantile Exchange Group, CME, begins trade of its own official Bitcoin futures contracts, on December 18.
For all the excitement about the NASDAQ and the SPX Technology sector outperforming, that's chickenfeed compared to Bitcoin's 1,924.40 percent rise.
With the price having just passed $20,000, we can't help but second-guess ourselves on whether this is a sustainable trend or a bubble about to burst, in fear of turning out to be the Nervous Nellies who continuously warn of a crash, while brave investors continue to be rewarded. Bitcoin's notorious volatility may have already masked a handful of crashes, particularly when it was not as well established on mainstream radar. According to Dr. Daniele Bianchi of the UK's Warwick Business School, those earlier crashes were essentially the result of a few types of events: hacking, regulatory interventions, technology updates and subsequent competition from other cryptocurrencies.
Today as well, the main risk for Bitcoin comes from external factors such as regulatory intervention and security breaches which might hit the credibility of the entire protocol and its effective usefulness as a method of payment/store of value. For all we know, 2017 may just have been the best year Bitcoin will ever seen. But, then, again, we were wrong about the virtual gold before. There are, of course, other cryptocurrency options beyond Bitcoin. Here are 6 whose 2017 rallies have been even more staggering than Bitcoin's.
The Week Ahead
All times listed are EST
Monday
5:00: Eurozone – CPI (November, final): YoY figure expected to remain flat at 1.5%.
Investors remain confident about both the German and eurozone economies, but the optimism was more measured in December. The well-respected ZEW Economic Sentiment indicator, a confidence barometer of institutional investors, slowed in December in the eurozone and Germany. Economic conditions are good, but investors must keep an eye on political developments as well, and there are some worrisome developments. Germany remains without a government, and uncertainty over Brexit continues to hover over the European Union. The euro reacted to the soft ZEW reports with slight losses this past Tuesday.
Tuesday
19:30: Australia – RBA Meeting Minutes: these will shed further light on the current views of central bank policymakers down under.
The Aussie dollar found support on its uptrend line since the beginning of 2016, bouncing above its downtrend line since September of this year. This dual technical event—finding the long-term support and crossing over the short-term resistance—paves the way for the Australian dollar to retest its 0.81 peak, posted September.
4:00: Germany – IFO Business Climate (December): business climate index forecast to hold at 117.5.
8:30: US – Housing Starts and Building Permits (November): building permits forecast to fall 4% MoM, and housing starts expected to be 6% weaker.
Wednesday
10:00: US – Existing Home Sales (November): growth is expected to fall to 0.9% MoM from 2%.
New home sales have been climbing sharply while existing home sales showed strength of their own in October, up 2.0 percent to a 5.480 million annualized rate. Gains were posted for single-family resales, up 2.1 percent to a 4.870 million rate, and condos, up 1.7 percent to a 610,000 rate. The pending home sales index, which tracks initial signings for resales, jumped strongly in the last report and has forecasters looking for significant strength in this report for November, at a consensus rate of 5.520 million.
15:30: US – EIA Crude Inventories (w/e December 15): stockpiles forecast to fall by 4.5 million barrels, from a 5.1 million barrel drop a week earlier.
The price of oil has entered a trading range since November 14. though we initially considered it a potential H&S top with a sloping neckline, it may actually turn out to be a symmetrical triangle. The direction of the breakout will determine the trajectory of the pattern’s impetus, whatever it is.
Thursday
8:30: US – GDP (Q3, final) (w/e 16 December): growth forecast to remain at 3.3%.
The third estimate for third-quarter GDP is expected to come in at a 3.3 percent annualized rate and unchanged from the second estimate. Consumer spending, also seen unchanged at 2.3 percent, provided some lift but the quarter really depended on an inventory build as well as strength in nonresidential investment and improvement in net exports. The GDP price index is seen unchanged a 2.1 percent rate.
8:30: US – Initial Jobless Claims (w/e 16 December): Claims forecast to rise to 234k from 225k.
8:30: US – Philadelphia Fed Manufacturing Index (Dec): expected to fall to 22.7 from 20.8.
Friday
2:00: Germany – GfK Consumer Confidence (January): expected to rise to 10.8 from 10.7.
4:30: UK – GDP (Q3, final): QoQ rate expected to be unrevised at 0.4%.
8:30: US – Durable Goods Orders (November): forecast to rise 2% MoM from a 1.2% fall in October, while the core figure, excluding transportation orders, is expected to rise 0.4%, in line with last month.
10:00: US – New Home Sales (November), Michigan consumer confidence (December, final): new home sales expected to fall 5% MoM, from a 6.2% rise in October, while the Michigan index is forecast to be 97, up from the previous 96.8 estimate
13:00: US – Baker Hughes Oil Rig Count: Prior North American rig count: 1168; US: 930; Gulf of Mexico: 19; Canada: 238