After The Close - The U.S. equity market started of the new week with a mixed performance. At the close of trading, the Dow Jones Industrial Average was ahead 40 points, while the S&P 500 Index was down three points, and the NASDAQ was lower by 32 points. Market breadth was somewhat negative, as losers easily outnumbered winners on the NYSE. Furthermore, the major stock sectors were largely divided. The energy and utility issues made some progress today, as the price of crude oil (now at over $52 a barrel) moved higher on hopes of production cutbacks. In contrast, the financial and technology names moved lower.
Meanwhile, traders received very few economic reports today. Tomorrow will be a light day for news, as well. However, Wednesday will be much busier. Specifically, we will get a look at the latest monthly reports for retail sales, industrial production, and business inventories. In addition, the main event will take place in the early afternoon, when the FOMC wraps up its two-day meeting and issues an interest-rate decision. Based on the developments up until now, it seems likely that the Fed will approve a quarter point rate hike at this meeting. However, traders will also be looking to see how Fed might act in the year ahead. We would not be surprised if the stock market exhibits a bit of volatility around this key event, as a result.
Elsewhere, in the corporate sector, few companies delivered their quarterly profit reports today. However, as the month of December wraps up, some companies may revise their full-year 2016 guidance, and this could set the tone for the upcoming earnings season.
Technically, stocks continue to hold up relatively well, as we get set to close out the year. For now, sentiment remains quite bullish (possibly overly so) with the VIX down at the 12.70 mark. - Adam Rosner
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
12:05 PM EST - Following another record-setting week for the major equity averages, a further run-up in oil prices (with WTI crude ahead about 4% at its peak this morning) has helped push the Dow Jones Industrial Average ahead to another intraday record high, this time above 19,800. But this latest surge by the blue-chip composite has been narrowly configured, with the two energy components, Chevron (CVX - Free Chevron Stock Report) and Exxon Mobil (XOM - Free Exxon Mobil Stock Report), providing most of the upward bounce. Elsewhere, the market is mixed to lower, with the S&P 500 Index, the NASDAQ, and the small-cap Russell 2000 all taking various sized hits as we pass the noon hour in New York.
As to the equity market this morning, as we start the second week of December, the mixed showing comes after overall declines in Europe earlier today (save for the Paris CAC-40) and in Asia overnight, with the setback in China's equity market especially sharp at some 2%. In addition to oil, a key influence on traders today has been the further spike up in bond yields. This increase comes as the U.S. Federal Reserve prepares for its two-day FOMC meeting, which is set to commence tomorrow morning. Expectations are almost universal that the central bank will raise interest rates on Wednesday for the first time in a year.
Regarding oil, prices still are firming following an historic output deal between OPEC and non-OPEC producers last week. Of course, now the deal must be implemented. According to the specifics, the Organization of Petroleum Exporting Countries, or OPEC, has agreed to reduce oil output by 1.2 million barrels a day for six months beginning on January 1, 2017, with Saudi Arabia taking the lead. As a result, oil is now in the $53-$54-a-barrel range, after having fallen back below the $30 mark early this year. At some point, such price strength will become an inflation concern.
With respect to interest rates, after having fallen back below 1.35% on the 10-year Treasury note, last summer, yields have climbed steadily this fall. That is especially so since the November 8th election on the expectation that President-elect Donald J. Trump will propose an ambitious infrastructure spending program. Yields on that benchmark issue are now up at roughly 2.50%. Yields on the corresponding 30-year Treasury bond, meantime, are up close to 3.20%. These are two-year highs.
Finally, the market's path today continues to be uneven, with the Dow now ahead by 26 points, but the S&P 500 Index lower by three points and the NASDAQ off by 36 points. Interestingly, in addition to the energy stocks, the utilities are up as are the telecom issues, both on apparent bargain hunting after recent losses. On the other hand, the industrials are experiencing some profit taking at this hour, as are the financials. In the small-cap space, the Russell 2000 is now off by more than half a percentage point. - Harvey S. Katz
At the time of this article's writing, the author did not have positions in any of the companies mentioned.
Before The Bell - It has been a remarkable run on Wall Street for those long equities. The post-election rally, which began on November 9th, has now extended well into December. Investors have bid up stocks on thoughts that the incoming pro-business friendly Trump Administration, which has promised sizable tax cuts and rollbacks in regulations, will be good news for both Corporate America and Wall Street. The latest bull run is being led by the economically sensitive sectors, most notably the financial, basic materials, and industrial groups.
The move higher last week has the major averages standing at record highs, with the Dow Jones Industrial Average producing more than 10 closing highs since the presidential election last month. The most recent five-day stretch of gains came despite pundits calling for some selling early last week on worries about the referendum results in Italy last week—and the effect it may have on Italy’s struggling banking sector—and the likelihood that the Federal Reserve may well begin to tighten the monetary reins this week. Our sense is that the latter event is already priced into the market, as the consensus among economists the last few months is that the central bank will raise interest rates by 25 basis points on Wednesday. The market also got a boost last week from the news that the European Central Bank (ECB) has extended its highly accommodative monetary policy in an effort to help some of the struggling economies on the Continent. Investors tend to view dovish monetary policy actions favorably—and that certainly was the case last week as the global equity markets rallied on the ECB news.
Speaking of the world’s central banks, the Federal Reserve is set to kick off its final two-day monetary policy meeting of 2016 tomorrow. As noted above, the prevailing consensus is that the central bank will hike short-term rates by 25 basis points, the first tightening since its meeting last December. We believe that such a maneuver is already baked into the market, so Wall Street may well be more interested to see what the Fed says, if anything, about future interest-rate increases. If the lead bank were to strike a dovish tone, it may keep the bulls in charge in an already white-hot stock market, but if the Fed takes a more hawkish view of monetary policy in 2017, it may produce some selling on Wednesday afternoon. The current consensus is that the central bank will rates interest rates two to three times over the course of next year.
We will also get some important economic news in addition the Fed’s monetary announcement on Wednesday. Of note, retail sales data for the month of November will be released on Wednesday morning at 8:30 A.M. (EST). This report, which is scrutinized by the Federal Reserve, will give investors a big clue as to how the holiday shopping season is treating the retailers. Thus, we think the results may have an impact on the market when it opens on Wednesday morning. In addition to the retail sales report, we will get data on producer and consumer prices, industrial production, and housing starts and building permits. All of the news from the business beat comes during the final three trading days of this week, so our expectation is that if we are to see any notable moves by investors, they will probably come later this week.
With less than a half-hour to go before the start of trading stateside, the equity futures are indicating a flat opening for the U.S equity market. This is not overly surprising, as we would not be very surprised if we did not see any major moves ahead of this week’s Federal Reserve announcement. Stay tuned. - William G. Ferguson