Market Update - December 19, 2016Submitted by Jodi Vleck , Beta Wealth Group on December 19th, 2016
For the week ended last Friday, when the Federal Reserve raised rates, U.S. stocks were mixed overall, with mega-caps gaining ground, while small caps gave up some gains. From a sector standpoint, defensive sectors such as telecom, utilities and healthcare experienced the strongest gains, while industrials and materials, which have had strong rallies as part of the post-election rally, lagged. While the FOMC rate hike was largely anticipated, the tone and forward-looking commentary regarding hikes in the coming year (the Fed suggested three such rate hikes are in the offing in 2017) was slightly more aggressive than expected by the market, which tempered some of the recent optimism. On the economic front, retail sales disappointed, while homebuilder sentiment and regional manufacturing surveys suggested economic activity is chugging along.
Foreign stocks fared well in Europe in local currency terms, as a stronger dollar is being viewed as a positive for exporters, since it could boost economic growth. However, dollar strength held back foreign stock returns for U.S. investors across major indices. Italian shares gained sharply after the conclusion of the prior week’s constitutional vote, which cleared up some uncertainty given the prevailing anti-European sentiment, but underlying structural problems remain unaddressed. Emerging markets such as Russia, which benefit from higher oil prices, gained ground while Chinese and Brazilian markets declined for the week, the latter due to news of a new corruption probe. Mexico markets also lost ground after rates were raised by 0.50% to combat weakness in the Mexican peso.
U.S. bonds declined almost across the board, due to rates moving higher across intermediate and longer-term segments of the yield curve. However, corporate credit outperformed government bonds, and high yield debt losses were minimal; bank loans, as expected, continued to gain ground and continue to attract an increasing amount of investor attention. Foreign debt across developed markets gained modest ground in local currency terms, while this translated to losses in US dollar terms due to dollar strength, this was true for emerging market debt.
Real estate equities declined a few percent consistent with expectations for higher rates in 2017. However, Asian and European real estate markets fared worse, due to currency effects. Of late, more cyclical parts of the real estate sector have outperformed as of late, including hotels/lodging and self-storage REITs, as well as apartment REITs last week.
Commodities gained ground slightly, led by strength in oil, offset by weakness in natural gas as well as precious and industrial metals. Oil traded within a narrow range before ending 3% higher, just under $53, after signing of OPEC's production agreement. The reason for the OPEC deal was to limit output, which would push prices higher, thereby raising oil revenue for affected developing nations and lessen the strain on related government fiscal budgets. On the other end, should oil prices get too high, U.S. shale producers would be content to ramp up output to fill the gap, as long as their costs are covered.