December 30, 2016

Markets opened lower on the last trading day of the year. The Dow is down 10 pts and the SPX is down .16% on very light trade volume. Year-to-date, US markets have performed significantly better than international markets. The dollar is lower against a basket of foreign currencies today, and commodities are mixed. Copper is up about .8% this morning, and is up about 16% this year. We understand much of that move is due to speculators in China rather than improvement in global economics. WTI crude oil is trading slightly lower this morning to about $53.66/barrel. Bonds are mostly unchanged. The 5-year Treasury yield is hovering around 1.95% and the 10-year is trading at 2.46%. Rates have come in over the last two weeks. Remember, the 10-year was at 2.60% on 12/15. That will likely stand as the 2016 peak yield.  

With the year nearly over, a quick look at stock market sector returns highlights the volatility we’ve seen, especially since the election. The best-performing sectors for the year: Energy +24%, Financials +20%, Telecom +18%, Industrials +16%. The worst-performing sectors: Healthcare -4%, Real Estate flat, Consumer Staples +2.5%. Drilling down into the those sectors, some industry groups were severely punished. Biotechs fell over 20% in 2016 and retailers were down about 2%. On the other hand, gold miners shot up over 50% and the semiconductor group surged 37%. 

The S&P 500 Index will end the year at a forward price-to-earnings ratio of 18.9. That’s the highest forward P/E ratio on the index in at least 10 years. And it means that investors are willing to pay much for stocks than they were a year ago, when the P/E was less than 17. It also means that stock prices have been rising even though corporate earnings estimates have not kept pace. So the big question for 2017 is this: when will earnings growth accelerate? If we don’t see evidence of better earnings in the next few months, the market likely won’t continue to trade at such a high P/E multiple.  

The Chicago Purchasing Managers Index (PMI) fell to 54.6 this month from 57.6 in November. No matter, the index is still at the higher end of the range going back two years. This is a regional survey of business activity and any reading above 50.0 indicates business expansion. The Chicago PMI spent a lot of time below 50.0 in the last half of 2015 and early 2016 when economic growth sagged, oil plunged and the dollar strengthened. But this survey and other gauges (i.e. ISM manufacturing) have corroborated steady improvement in the manufacturing sector over the last 8-10 months. By the way, there are five different regional business surveys conducted by Federal Reserve banks, and all of them are now back into expansionary territory.

US auto sales have peaked. Vehicle sales, which plunged to about 10 million units back in 2009, enjoyed a rapid rebound in the years after the Great Recession. Sales hit 17.5 million units in 2015 and are expected to be about 17.6 million in 2016. But Bloomberg estimates 2017 sales will dip to 17.3 million units. The country’s return to more or less full employment, as well as rising wages, helped drive demand for autos. But economists cite rising interest rates & gasoline prices as headwinds going forward. 

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