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December 1, 2016
U.S. equities notched a nice gain for the month of November with a strong rally since the election. For November the S&P 500 Index gained 4.12% putting the Year-to-Date gain of the S&P 500 at 7.58%. The DOW finished November at 19,157, a 5.6% gain for the month. The NASDAQ gained the least of the major indices coming in at a modest 2.42% gain this month.
The Markets – Just one day prior to the election Bloomberg published their prediction as to how the markets would react to a victory by each candidate. They predicted, as did many others, if Trump won the markets would correct as much as 15% and the fear trade, Gold, would rally about 15%. In short, they were wrong. The markets have rallied nicely with Financial and Industrials leading the way, both clocking in with a gain just above 11%. On the other hand, Gold has clocked a negative 11% since the election. Long term, our concern is China and other US trade partners. That concern remains intact and is not likely to change anytime soon.
Headlines – OPEC announced a deal to cut production for the first time in eight years. Oil, more specifically, West Texas Intermediate crude (WTI) rallied 8% to just under $50 a barrel. How sustainable will any rally be through 2017 and what will likely derail a sustained rally? First, the folks at the bargaining table tend to lie and not honor their agreements. Second, shale output in Asia, the North Sea, and the Eagle Ford tend to put a cap on price. Production tends to ramp up in these areas when WTI approaches $60 per barrel. Last, but not least, the OPEC deal works if non-OPEC members also cut production some 600,000 barrels per day. Don’t count on Russia, South America or North America to cooperate.
The Economy & The Fed – Unemployment in the euro zone dropped to 9.8%, the lowest level since July 2009. Meanwhile unemployment at home in the U.S. hovers around 5%. We continue to watch the jobs number, manufacturing data and housing as key indicators to the health of the U.S. economy. The markets have priced in a 100% probability that the Fed will raise rates in December. While that is a sign that the Fed is at least somewhat comfortable with our economy, it does put pressure on the bond markets. In fact, with European sovereign debt looking vulnerable, Chinese rates continuing to rise, and the upward pressure on the U.S. Treasury, bond investors have seen an estimated $1.7 trillion wiped off their net worth over the month of November. The Barclays Global Aggregate Total Return Index had its worst month since its inception in 1990.
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