Week of December 12, 2016
It was another great week for the equity investor. Last week global markets generally posted strong gains with our own major indices up over 3%. More specifically, the S&P 500 and Dow Jones Industrial Average were up 3.08% and 3.06%, respectively, while the NASDAQ Composite was the clear outperformer, posting a 3.59%.
Japanese equities were up as well with the Nikkei 225 average notching a 1.86% gain while European equities, as measured by the MSCI Europe Index, up just over 3.5%. For a commentary this week, we take a closer look at the Dow Jones Industrial Average and its impressive run over the past few weeks. We also touch on some of the highlights of Italy's recent election and the European Central Bank's policy actions. We conclude with a fun story on the special relationship between Nova Scotia and Boston.
DOW’s Heavy Lifters
The U.S. stock markets have surged to new all-time highs since the Presidential Election. The Dow Jones Industrial Average Index is up an astonishing 1,280 points since November 8 and more than 400 points since December 1. Interestingly, more than half of the run-up is attributable to four stocks: Goldman Sachs (GS), UnitedHealth Group (UNH), J.P. Morgan Chase (JPM) and Caterpillar (CAT); contributing 408 points, 112 points, 103 points and 79 points, respectively, since the election. We note that, unlike the S&P 500 which is market cap weighted, the Dow Jones Industrial Average is a price-weighted index and the higher dollar price of these stocks gives them an outsized influence on the benchmark. While that is a big factor in explaining the Dow's run, the rally does appear relatively broad based with 22 of the 30 Dow components rising over the past month. Moreover, 77% of the index constituents were trading above their 200-day moving average as of this writing. For context, the Dow is up 7% month-to-date while the S&P is up 4% over the same period.
Source: Morningstar Direct
Italy Says ‘No’
60% of Italy’s voters said ‘No’ to proposed changes to the country’s constitution. The ballot initiative was intended to speed up government decision-making and catalyze its stagnant economy. Prime Minister Renzi resigned after the referendum vote, pushing the fragile economy into yet another political crisis. His resignation could have big implications not only for Italian politics but also for the health of Italy’s banks and the future of Europe’s common currency, the Euro. Indeed, Italian banks are teetering on the edge of insolvency. One of Italy’s oldest banks, Monte dei Paschi di Siena, is planning to sell new shares to raise capital which may be hampered as the results of the vote may scare away investors worried about political stability. Moreover, the stage is slowly being set for a battle over Italy's place in the EU. Far-right parties will want to capitalize on the momentum of the referendum victory and call for Italy's exit from the Eurozone, which they have repeatedly in the past months. If there is even a small chance that Italy will exit the Eurozone within the next five years, investors will be reluctant to put their money into Italian banks today. While a “no” vote may directly lead to Italy's exit from the European Union, it does make it more likely.
European Central Bank: Hot and Cold
At its most recent policy review, the European Central Bank (ECB) held its key rates steady but decided to scale back its bond purchases to 60 billion euro from 80 billion euro starting in April 2017. However, the regulator did state that if the economic outlook of the region turned less favorable, the central bank would increase its monetary accommodation program both in size and duration. Investors, not expecting the move, drove bond yields up while the euro slipped last week. Additional tapering seems unlikely over the next year given the political uncertainty as most countries in continental Europe are due for elections and other ballot initiatives. The ECB has been a significant buyer of U.S. assets and any further tapering can be viewed as a negative for U.S. markets. Economists expect annual real GDP of the Eurozone to grow 1.7% in 2016 as well as 2017 but slowing to 1.6% for 2018 and 2019.
Fun Story of the Week
Boston and Nova Scotia have a very close relationship with the latter sending a giant spruce tree each Christmas going on 45 years. The tradition started in 1917 after a French munitions ship crashed into a Norwegian ship in Nova Scotia's Halifax Harbour. The resulting explosion killed almost 2,000 people and injured some 9,000 more. The city of Boston hastily dispatched a train loaded with medical professionals and supplies to help those in need. It wasn't until 1971 that the tradition was rekindled by local tree growers to show their long-lasting appreciation. Unfortunately, there are a few Grinches noting that while the gesture is certainly nice, Nova Scotia is starting to go a bit overboard. Indeed, the Canadian province spent a tidy sum of $180,000 to locate, cut and ship last year's tree. On the other hand, many point out that the annual gift is a way to raise tourism and awareness to Nova Scotia.
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This newsletter was written and prepared by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
NIKKEI 225 AVERAGE INDEX
The Nikkei 225 Average Index is a Japanese index that tracks the top 225 companies listed on the Tokyo Stock Exchange. It includes the most liquid Japanese stocks listed in the first section of the Tokyo Stock Exchange. It is price-weighted and yen-denominated.
MSCI EUROPE INDEX
The MSCI Europe Index captures large- and mid-cap companies across 15 developed markets countries in Europe.
Wall Street Journal, December 2016. http://www.wsj.com/articles/bostons-christmas-tree-comes-with-a-twitter-account-an-entourage-and-some-scrooges-1481489737
Vox, December 2016. https://www.vox.com/new-money/2016/12/3/13826150/italy-referendum-banking-crisis
Market Watch, December 2016. http://www.marketwatch.com/story/dow-sp-on-pace-to-hold-near-record-highs-as-ecb-grabs-spotlight-2016-12-08