Weekly Commentary, 11/21/16 to 11/25/16
Stocks continued their post-election rally through the short Thanksgiving week with the major U.S. indexes setting record highs. The S&P 500 Index and the Dow Jones Industrial Average each gained approximately +1.50%. The small cap Russell 2000 Index furthered its gains versus the other major indexes, rising +2.38% on the week. Since the election the Russell 2000 has spiked +13% compared to a +4.89% gain for the Dow Jones and +3.84% for the S&P 500. Small cap stocks are perceived to benefit more than larger cap stocks from president-elect Trump’s proposed tax cuts, reduced regulation and a stronger dollar.
The week was also highlighted by a bounce in both the developed and emerging markets.
Bond markets continued their sharp sell off on more signs of economic strength and a potential rate hike in December. Wednesday, the Department of Commerce reported a 4.8% rise in durable goods orders, the fastest pace in a year. The minutes from the Federal Reserve’s November meeting indicated that most officials believe a rate increase could be become appropriate “relatively soon”. The yield on the 10 year U.S. Treasury note settled at 2.37% up from 1.83% on November 7.
Although the major indexes are setting new highs not all sectors are participating. Beneath the market there is a clear rotation taking place from sectors that are negatively impacted by president-elect Trump’s promises into sectors that stand to benefit from the potential changes. Sectors that are characterized as defensive such as consumer staples and utilities are off between -3% and -4%. Sectors that could reap benefits are experiencing gains of +3% to +5%.
The relationship between growth and value stocks in the benchmark equity measure has also decoupled. Growth stocks, having outperformed value stocks for the past 3 years, may now be giving back leadership.
It is encouraging to see U.S. economic conditions improving as evidenced by all the major U.S. stock indexes setting new highs and even the international markets showing improvement. The market internals—or breadth measures—that we study at Stadion continue to show marked improvement as well.
Sentiment is now clearly positive but there are still headwinds. Equity valuations are stretched. Will higher yields inhibit multiple expansion or even slow the economy? The markets are never easy to navigate. In this instance, the rise itself may convey a need for caution, especially given the unpredictable nature of government policy. There are many questions left to be answered over the next few months.
Meanwhile, Stadion believes its strategies are currently positioned to take advantage of continued market improvement. Rather than becoming complacent we will do what we always do: follow our processes with a keen eye on managing risk across all strategies.
Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion’s investment strategies may lose money. The investment strategies presented are not appropriate for every investor and financial advisors should review the terms and conditions and risks involved. Stadion’s actively managed portfolios may underperform during bull markets. Some information contained herein was prepared by or obtained from sources that Stadion believes to be reliable. There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained. Any market prices are only indications of market values and are subject to change. The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock price. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. It is the most widely quoted measure of the overall performance of the small-cap to mid-cap company shares. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. It is not possible to invest directly in indexes (like the S&P 500) which are unmanaged and do not incur fees and charges. The U.S. 10-Year Treasury Note is a debt obligation issued by the United States government that matures in 10 years. The Sharpe ratio measures the excess return per unit of deviation, or risk. The core personal consumption expenditures index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices. Any references to specific securities or market indexes are for informational purposes only. They are not intended as specific investment advice and should not be relied on for making investment decisions.
Past Performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money.