State of the Stock Market Analysis for the Week Ending December 25th, 2016 (Major Indices Continue to Climb for the Holidays 12-25-16)
It was a long year for investors, but we closed out Friday with the three major indices slightly higher as we head toward the last week of trading. Bulls are still optimistic that we can somehow see 100 or so Dow points by New Year’s Weekend that will send us into 2017 with the Dow Jones Industrial Average above 20,000. We came very close this week, but the enthusiasm eased after Tuesday and Wednesday, and by Thursday and Friday it looked as though Wall Street (and buyers) were not ready to do much buying into the three-day Christmas weekend. It was a plus, however, to see all three of the major indices tick up enough to close Friday out on a positive note.
As we all recall, 2016 began a whole lot different than 2017 seems ready to begin. The Fed had raised interest rates in December of 2016 for the first time since the 2008 meltdown, and because it had been more than eight years since we had witnessed a rate hike, investors sort of lost their marbles. The S&P 500 hung on fairly well following the Fed’s quarter-point rate hike, but it fell hard and fast in January of 2016. We bottomed in mid-February with the S&P off by about 10% from its December “pre-Fed” levels (the Dow fell below 16,000), and it looked like we were going to be in for a “rough-and-tumble” 2016.
It was an election year, earnings were “so-so” in December, and the thought of more Fed rate hikes in 2016 loomed. Stocks bounced back following the February declines, though, which was a big plus as we headed toward Spring. Then the Presidential nomination race began, and once again the likes of Bernie Sanders and more than a dozen GOP hopefuls made the march toward their summer conventions. Whoever was going to be the nominees in both parties seemed pretty much “up for grabs.” This helped lead toward the second big pullback of the year, and the Dow dropped to around the 17,000 level from its post-February rally above 18,000. The Dow and the broader market bounced back through August but then went into yet another pullback through the eve of the Presidential election.
As election eve unfolded, we saw the Dow futures down by something like 600 points that night, but once the election was settled the next day, the stock market rallied in a big way to where we find ourselves today. With four trading days left in the year, the major indices are set to book some solid gains for 2016. Year-to-date, the Dow has gained more than 14%, the Nasdaq is up more than 9% and the S&P 500 has risen by about 11%. The small-cap Russell 2000 is one of the star indices of the year, and it is up more than 21% for the year. Even the Dow Transportation Index impressed investors with its 23% year-to-date gain. It has been a pretty good year for the Bulls despite a lot of uncertainty and challenges.
So what could be on tab for the stock market in 2017? Well, the Fed seems a lot less terrifying than it was last year when it raised rates by a quarter point in December 2016. This December’s quarter-point hike was met with a shrug, and stocks headed higher. The Fed even hinted at this year’s December meeting at two or three rate hikes in 2017, and again, that did not seem to worry optimistic investors, who seem to be looking more to the future than looking backward toward the Fed. Longer rates have already risen, and the 10-year U.S. Treasury is up to around 2.55% after dipping below 1.40% in July. Investors seem to like the Fed “behind the curve,” so maybe it would be best for Janet Yellen and the Fed to stay there.
As for the broader economy, we continue to get positive signs. This week we saw third-quarter GDP revised upward to 3.5%, and that topped estimates of 3.3% and the previous 3.2% reading. The new home sales report for November came in at 592,000, which topped estimates of 585,000 and the previous month’s 563,000, so the housing market is clearly holding up well, despite having rates tick upward. Adding to this economic good news was seeing the University of Michigan consumer sentiment report rise to a 12-year high of 98.2. This portrays a fairly strong economic picture, and having consumer sentiment on board is an additional plus as we head toward the New Year.
We have a new Administration coming into play in the latter part of January, and while that may bring uncertainty, Wall Street and investors are giving an initial “thumbs up” to the change. With four trading days left in this very interesting year, the odds seem to favor more upside. There has been a lot of institutional selling in terms of rebalancing portfolios and tax-loss strategies, so that could have been weighing on the stock market a bit this past week. We will wait and see what happens next week. The Gorilla wishes each and all a very Happy Holiday season, and a great way to head into New Years would be to have the Dow above 20,000 to kick off 2017.
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