From Briefing.com: Weekly Recap - Week ending 30-Dec-16
Week in Review: Quiet Pre-Holiday Week Followed by Quieter Post-Holiday Week
The post-holiday week saw a wider trading range than the pre-holiday stretch, but fewer investors took part in last week's action, making it easier to push the market around. The S&P 500 lost 1.1% after spending the week in a 40-point range (vs 17 points in the prior week) while average daily NYSE floor volume was just 758 million shares vs 853 million two weeks ago. The benchmark index finished ahead of the Nasdaq Composite (-1.5%), but behind the Dow Jones Industrial Average (-0.9%) and the Russell 2000 (-1.0%).
The abbreviated week started on an unassuming note with the S&P 500 rising 0.3% while the Nasdaq (+0.5%) outperformed. The Tuesday session saw the lowest volume of the week and almost everyone's attention was on the technology sector (+0.6%) where NVIDIA (NVDA) surged 6.9%. The move was not owed to any particular news item, but it called attention to the stock's meteoric rise in 2016. Tuesday's surge extended NVIDIA's 2016 gain to 256.0%.
With a dearth of overnight news, NVIDIA was back in focus on Wednesday. This time around the stock plummeted 6.9% after Citron Research pointed out that the company may find increased competition from AMD (AMD) and Intel (INTC) in 2017. The PHLX Semiconductor Index (-1.9%) gave up its entire gain from Tuesday, leading the technology sector (-0.9%) lower. Wednesday's weakness in the technology sector caused the Nasdaq to settle behind the S&P 500, which is how the tech-heavy index continued into the weekend.
Thursday ended on a flat note while Friday's session was highlighted by a decline in Apple (AAPL) after Nikkei Asian Review reported that supplier data suggests the company will be reducing iPhone production by 10.0% during the first quarter of 2017. Apple wasn't the only weak spot as most heavily-weighted components registered comparable losses while chipmakers also struggled.
2016 Year in Review: A Year of Extremes
2016 has come to an end, and depending on one's decidedly unique experiences, that consideration is either good, bad, or indifferent. The stock market for its part pretty much covered all of that ground in 2016. It was good at times, bad at times, and seemingly indifferent at times.
In the end, though, 2016 will go down as a good year for the stock market -- better than it had a fundamental right to be -- largely because of a year-end rally that hardly anybody saw coming.
It was a remarkable end really to a remarkable year, which started with a whimper and most definitely ended with a bang. Frankly, it was a year of extremes.
A Reversal and Then a Reversal
Things couldn't have gotten off to a worse start in 2016 than they did. The S&P 500 declined 5.1% in January; meanwhile, the Dow Jones Industrial Average declined 5.5%, marking the worst start to a year for the Dow -- ever!
To be sure, things fell apart quickly to begin the year.
China's stock market dropped 7.0% alone on its first day of trading in 2016. That set the tone for a month that was besieged with concerns about a depreciating yuan, falling oil prices, widening credit spreads, declining earnings estimates, disappointing economic data, the Bank of Japan stunning global markets with the introduction of negative interest rates, and escalating tensions between Saudi Arabia and Iran.
Deflation and recession were some of the early economic buzzwords making waves at the start of 2016, which is all the more remarkable considering inflation and escape velocity were the economic buzzwords flying around the market as 2016 came to an end.
The meltdown didn't end when January came to an end either. The first half of February brought additional selling pressure that left the S&P 500 down 11.4% for the year at its close on February 11 -- and then the selling ended.
That would be the low for the year and an inflection point that was driven home by the disclosure that JPMorgan Chase CEO Jamie Dimon had purchased 500,000 shares of JPM stock, spending $26.6 million in the process to do so.
Soon thereafter, many things fell into place and an extreme in bearish sentiment, which was accented by a fear of being in the market, was replaced by some newfound optimism and a fear of being out of the market.
Oil prices started to rise, economic data improved, the People's Bank of China cut its required reserve ratio, and central banks, led by the Federal Reserve, effectively pledged their undying monetary policy support to keep things propped up in a bid to fend off the worst-case scenario of a global recession. At one point this year, there was roughly $13 trillion of global debt with negative rates.
While the S&P 500 declined 0.4% for the month of February overall, it surged 5.6% from its close on February 11 to the end of the month.
It was a relief rally if there ever was one. It restored investors' faith in the Fed put and left them practically agnostic to the fact that the S&P 500 wasn't reporting any earnings growth for the fourth quarter in a row.
Votes of Anti-Establishment Note
The rally didn't end when February did. March was a huge month, producing a 6.6% gain for the S&P 500, which was followed up by a 2.7% gain in April, and a 1.5% increase in May.
From the low in February to the high in May, the S&P 500 tacked on 274 points, or 15%, proving yet again the futility of trying to short a market that has the full faith and disputable credit of the Federal Reserve backing it.
June was a month of trading indifference. The S&P 500 pretty much went sideways, taking some needed time to consolidate its Dimon-plated rally effort and to deliberate in front of the June 23 Brexit vote.
That vote proved to be a stunner as the majority of UK voters voted in favor of the UK leaving the European Union. That decision flew in the face of conventional polling wisdom and it triggered a knee-jerk sell-off that knocked the S&P 500 down 113 points, or 5.3%, in the two sessions following the result -- and then the selling ended.
Those losses were recouped and then some two weeks later. The stock market's resilience was a surprise to many, which helped put another squeeze on short sellers and sidelined participants, all of whom soon recognized that the uncertainty propagated by the Brexit vote was going to forestall a Fed tightening yet again.
There was some even deeper meaning in the Brexit vote, though, and it was the understanding that it signaled a strong wave of discontent with establishment politics. It was a populist vote centered on nationalism and the right for the UK to set its own course without judicial intervention, bureaucratic roadblocks, and immigrant mandates from the European Union.
It would result in a huge weakening in the British pound and a major flight to safety in the 10-yr Treasury note, which saw its yield fall to 1.36%. In hindsight, the Brexit result was also a huge preview of what was to come in the U.S. election in November and Italy's constitutional reform referendum in December.
The defining characteristic of those votes is that they signaled an extreme shift from establishment politics to anti-establishment politics and created a nervous political tone going into 2017 when elections in France and Germany will be held, the UK is expected to trigger Article 50 to begin its divorce from the EU, and the Trump Administration will take over in Washington.
Market Plays Its Trump Card
Briefly, the stock market meandered its way through the months of August, September, and October with a somewhat negative orientation that was rooted in falling oil prices, a weak health care sector, and rising bond rates.
The biotech stocks in particular were hit hard as talk on the campaign trail of drug price controls clipped their wings.
The S&P 500 registered fractional losses in a tightly-wound market those months before dropping 1.9% in October -- and then the selling pretty much stopped.
Granted there was a little leakage at the start of November, but then Election Day came on November 8 -- and from that point pretty much all of the selling in the stock market stopped while a good bit of selling in the Treasury market was just getting started.
The Cliffs Note version of events is that Donald Trump stunned conventional polling wisdom and won the electoral vote. In turn, the GOP won enough seats to have majority control in both the House and Senate.
There were huge declines in the futures market on Election Night when results pointed to a Trump victory, yet there was even a bigger reversal in the cash market when trading began the next day.
That key reversal was predicated on stock market participants latching onto the idea that a Republican president and a Republican-controlled Congress presented a real possibility to implement what have been deemed to be pro-growth policies that include tax cuts for businesses and consumers, deregulation, infrastructure spending, and the repeal and replacement of the Affordable Care Act.
At the close of business on November 8, the S&P 500 was up 3.7% for the year before dividends. It closed 2016 with a 9.5% gain.
The post-election rally was powered by the financial sector, which took off on a pro-growth trade that featured a steepening yield curve, and cyclical sectors that would be in a prime position to benefit from faster growth and rising inflation.
Every major index rallied to new all-time highs as money managers chased performance and aimed to compensate for having underweight positions in the stock market.
The Russell 2000, which has a predominately domestic orientation, had more momentum than them all, gaining as much as 16.5% in the month following the election. The Dow Jones Industrial Average, meanwhile, gained as much as 9.0% and flirted with eclipsing the 20,000 level.
The U.S. Dollar soared, bolstered by economic optimism surrounding the U.S. and interest rate differential trades, and the CBOE Volatility Index collapsed.
The Treasury market for its part got hit hard, pressured by inflation concerns flowing out of fiscal stimulus plans from the new administration and a rotation out of bonds and into stocks.
In effect, the "Fed put" ceded its overwhelming influence to the "Trump put," which is to say visions of stronger economic growth driven by pro-growth policies overshadowed any negative news items and unleashed some animal spirits in the stock market that haven't been seen for some time.
Making matters even better was a surprising agreement from OPEC to cut its production and many non-OPEC producers, including Russia, jumping on board with a production cut agreement of their own. That helped drive up oil prices, which in turn lifted the energy sector.
Consistent with the year of extremes, oil prices, which cratered to $26.21 per barrel on February 11, settled the year at $53.75 per barrel.
More to the Rally Story
The end-of-year rally wasn't all about the Trump trade, however. It is important to note that economic growth was picking up even before the election result, evidenced by rising levels of consumer spending that flowed from a strengthening labor market.
The U-3 unemployment rate, which started the year at 5.0%, hit 4.6% in November. The U-6 unemployment rate, which accounts for both unemployed and underemployed workers, dropped to 9.3% from 9.9%.
That understanding spurred the Fed to raise the target range for the federal funds rate to 0.50% to 0.75% in December, marking the only rate hike from the Fed in 2016. The stock market handled the rate hike reasonably well based on the belief that rates were going up for the right economic reasons and not just to get some insurance in the event the fed funds rate needs to be lowered in the future to deal with a negative shock.
Another important aspect of the year-end rally was the understanding that the S&P 500 earnings recession had come to an end in the third quarter, breaking a string of five straight quarterly declines on a year-over-year basis.
It was a welcome sight, but even with the earnings growth in the third quarter and the projected growth for the fourth quarter, calendar year 2016 earnings are still only expected to increase 0.1%, according to FactSet.
Double-digit price gains on the back of basically no earnings growth is why we asserted earlier that 2016 was better than it had a fundamental right to be for the stock market.
Alas, what the stock market lacked in earnings growth in 2016 was more than made up for by its old faith in the Fed put and its newfound faith in the economic and earnings outlook for 2017. That faith is reflected in many respects in the performance data below.
We can't know for certain what 2017 will bring, but we look forward to covering it all. We can say with certainty today, however, that we are grateful for your readership throughout 2016 and wish you all the best for a happy, healthy and prosperous new year.
Market
S&P Small Cap 600 (+24.7%)
Russell 2000 (+19.5%)
S&P Mid Cap 400 (+18.7%)
Dow Jones Industrial Average (+13.4%)
Wilshire 5000 (+10.7%)
S&P 500 (+9.5%)
Nasdaq Composite (+7.5%)
Nasdaq 100 (+5.9%)
S&P 500 Sectors
Energy (+23.7%)
Financials (+20.1%)
Telecom Services (+17.8%)
Industrials (+16.1%)
Materials (+14.1%)
Utilities (+12.2%)
Information Technology (+12.0%)
Consumer Discretionary (+4.3%)
Consumer Staples (+2.6%)
Real Estate (0.0%)
Health Care (-4.4%)
Source: FactSet
Index Started Week Ended Week Change % Change YTD %
DJIA 19933.81 19762.60 -171.21 -0.9 13.4
Nasdaq 5462.69 5383.12 -79.57 -1.5 7.5
S&P 500 2263.79 2238.83 -24.96 -1.1 9.5
Russell 2000 1371.51 1357.13 -14.38 -1.0 19.5
The broader market finished Friday lower as investorsprepare for the New Years holiday. Action in the Technology (XLK -0.9%) sector was mostly negative, as the sector closed -0.4 pts up/down. The Nasdaqclosed the session down 48.9 pts ( -0.9%), while the S&P closed lower 10 pts (-0.5%) and the DowJones Industrial Average dropped 53 pts ( -0.3%).
With the trading year now officially over, here is a shortlist of the biggest technology (XLK) advancers and decliners of 2016.
Largest Advancers YTD:
Nvidia (NVDA +238%)
Applied Materials (AMAT +75%)
Micron (MU +57%)
Largest Decliners YTD:
First Solar (FSLR -51%)
Frontier Communication (FTR -28%)
Alliance Data Systems (ADS -17%)
Notable news items from IT companies:
Qualcomm (QCOM -1.3%) and Meizu Technology announced that, based on equal and fair negotiation, they have reached a patent license agreement whereby Qualcomm grants Meizu a worldwide royalty-bearing patent license to develop, manufacture and sell CDMA2000, WCDMA and 4G LTE complete devices
Lucid Motors, a luxury mobility company, and Mobileye N.V. (MBLY -0.8%) announced a collaboration to enable autonomous driving capability on Lucid vehicles. Lucid will launch its first car, the Lucid Air, with a complete sensor set for autonomous driving from day one, including camera, radar and lidar sensors. Mobileye was chosen to provide the primary compute platform, full 8-camera surround view processing, sensor fusion software, Road Experience Management crowd-based localization capability, and reinforcement learning algorithms for Driving Policy.
Analyst actions:
Yandex N.V. (YNDX -1.1%) was initiated with a Outperform and $26 price target at Credit Suisse.
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