Week of December 26, 2016
Broad equity benchmarks traded up slightly heading into the long holiday weekend. The United States' Dow Jones Industrial Average and NASDAQ Composite were up 0.46% and 0.47%, respectively, while the S&P 500 was up just 0.25%.
Japan's Nikkei 225 Average started the week up over 1% and ended the trading session notching a 1.1% gain. European equities, as measured by the MSCI Europe Index, were also in the positive last week, posting a 0.45% return. This week we focus on the Dow Jones Industrial Average and its hike towards 20,000. We follow with a review of current mortgage rates and their impact on home purchases before updating our readers on the status of the world's oldest bank, Italy's Monte dei Paschi. We conclude our commentary with a fun story on a new type of therapy, personalized book recommendations.
The Dow Flirts with 20K
The markets continue to rise sometimes pausing only to catch a breath. The Dow Jones Industrial Average (DJIA) touched a record high of 19,987.63 on December 20 and its quest for the 20,000 level continues. The bulls have added nearly 1,900 points since the November 8 elections on optimism about pro-business policies the new Trump Administration may adopt. While most may acknowledge that the markets seem overpriced now, there are expectations of lower capital gain taxation under the Trump Administration which could be providing a degree of support to the market. Retail investors have propelled the rally and are perhaps holding on to see if they can benefit from regulatory changes in the upcoming year. We would be remiss not to note that policy shifts take quite some time to manifest and even longer to drive economic growth and higher earnings. For now, it appears expectations are driving the bulk of the market's upward movement.
Source: Morningstar Direct
Home Buying Continues Despite Higher Rates
The Federal Reserve raised rates by 0.25% last week and the yields on 10-year Treasury Bonds peaked at 2.6%. The 30-year mortgage rate, which is tied to 10-year bond yields, rose from 4.16% to 4.30% week-over-week. For context, home buyers a year ago were looking at rates of 3.96% for a 30-year mortgage. Despite the rising rates, total loan application volume increased 2.5% from the previous week, with both purchase applications and refinancing requests rising 3%. While the volumes are lower than pre-rate hike numbers, it remains strong. We would note that the prospect of higher rates in the near future continue to encourage home purchases. Recent purchase activity remains skewed towards higher priced homes with the average loan size at $312,000 which is well above the median home sales price.
Source: Freddie Mac
Troubled Waters Ahead for World's Oldest Bank
In early December, Italy voted against constitutional changes that were designed to consolidate power in the government and allowing swifter financial and regulatory changes among others. Italy's Prime Minister Renzi vowed to resign should Italians vote against the initiative and he has followed through with his pledge, plunging the country into political chaos and the first casualty appears to be Monte dei Paschi di Siena. Italy’s third largest lender has been teetering on the edge of insolvency with non-performing loans adding up to the tune of €27 billion. To solve the issue, the bank was planning to sell new shares to shore up its balance sheet but the efforts have fallen apart. What's more, the bank has already lost more than 80% of its stock value since the start of the year and has stated that it could run out of funds in about four months, much sooner than the estimated 11 months investors originally expected. The Italian Government has agreed to bailout the bank if required, and created a fund of €20 billion. However, the European Union does not allow state aid for bailouts and the details of the agreement have yet to surface. Italy’s banks are straddled with significant bad loans and the current issues affecting Monte dei Paschi could potentially destabilize the wider Italian banking system
Fun Story of the Week
Looking for an alternative to the psychiatrist's couch? Why not try your own with a book from a bibliotherapist? Also known as "book doctors", these self-proclaimed therapists treat ailments such as stress, listlessness, procrastination and depression by talking to clients about their issues and offering a prescription, (emphasis on "script") that they believe will help. "Reading a novel can affect a deep transformation,” says Susan Elderkin, a British bibliotherapist. Stressed? They might prescribe 'The Old Man and the Sea', a relaxing read for someone under pressure. Depressed? Try reading Thomas Hardy's 'Jude the Obscure' which should help cheer you up. One consultant describes it as a tragedy starting on page one that only gets worse but the story helps people feel as though nothing in their life could ever be as bad, or so they say. Most "book doctors" heavily recommend fiction and occasionally non-fiction, such as autobiographies or memoirs, if the condition warrants but they do note that this type of therapy isn't for everyone. If the situation is extreme, the bibliotherapist would recommend they seek out a professional psychologist.
Securities offered through Jacques Financial, LLC (JFLLC) a Broker-Dealer, Member FINRA and SIPC.Certain associates of Joseph W. Jacques, CPA, CFPTM are registered representatives of JFLLC. Joseph W. Jacques, CPA, CFPTM and JFLLC are affiliated. Investment advisory services are offered through Jacques Advisors, LLC an affiliate of JFLLC. Tax services are offered through Jacques & Associates Certified Public Accountants, LLC an affiliate of JFLLC.
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.
Fox Business, December 2016. https://www.foxbusiness.com/markets/2016/12/21/with-dow-20k-within-striking-distance-trump-rally-takes-pause.html
Investor’s Business Daily, December 2016. http://www.investors.com/market-trend/stock-market-today/dow-flirts-with-20000-as-caterpillar-goldman-sachs-nike-score-gains/
Chicago Tribune, December 2016. http://www.chicagotribune.com/business/ct-mortgage-rates-20161222-story.html
CNBC, December 2016. http://www.cnbc.com/2016/12/21/borrowers-brush-off-rising-rates-pushing-mortgage-applications-higher.html
CNBC, December 2016. http://www.cnbc.com/2016/12/21/monte-dei-paschi-warns-liquidity-expected-to-run-out-in-4-months-not-11-as-previously-forecast.html
Independent, December 2016. http://www.independent.co.uk/news/business/news/monte-dei-paschi-di-siena-bailout-italy-government-state-private-rescue-fund-fail-a7489601.html
Wall Street Journal, December 2016. http://www.wsj.com/articles/book-doctors-say-what-you-need-is-a-good-read-1482091512