Week of November 28, 2016
Equity investors across the world enjoyed positive returns last week. The Dow Jones Industrial Average, the S&P 500 and the NASDAQ Composite were all up between 1.44% and 1.51%. Asian equities were mixed with China's Shanghai Composite up 1.81% and Japan's Nikkei 225 Average flat for the week. European equities, however, posted a solid five trading days with the MSCI Europe Index up 1.28%.
For this week's commentary, we wanted to focus on U.S. stocks' record run, oil's volatility ahead of the OPEC meeting later this week and Italy's impending constitutional referendum. We lighten things up a bit with a fun story on a wily nuisance plaguing a quiet Pittsburgh neighborhood.
U.S. Indices End at Record High
The major U.S. indices hit record highs last week with the Dow Jones Industrial Average crossing the 19,000 mark for the first time in history and the S&P 500 topping its intraday high. The Russell 2000, which tracks small cap stocks and has been rising for the previous 13 consecutive trading days, also closed at all-time highs last week, surging a further 2.41%. The index is up 18% this year, more than twice as much as the S&P 500. Trump-fueled euphoria, based on the President-Elect’s talks about pro-growth fiscal policies, has helped stocks and the U.S. dollar but weighed on bonds. The markets appear to be pricing in the possible transition from an interest-rate driven market into an earnings-driven market. Relatedly, the probability of a rate hike in December now stands at 100% according to the futures market. Most industrial commodities are seeing a surge in prices. We would note that the run-up in prices has pushed valuations into overvalued territory but last week proves that investors appear to be looking past those metrics. We also found it interesting that the majority of investors flowing into stocks appear to be retail, while institutional investors seem to be taking a "wait and see" approach.
Source: Morningstar Direct. 11/26/2006 to 11/24/2016
Crude Price Hinges on OPEC Meeting
The Crude Oil Volatility Index reached new 2016 highs amid both optimism and skepticism around OPEC’s ability to cap output at its November 30 meeting. Currently, there is disagreement within the organization regarding which member states should cut production and by how much. We note that crude inventories declined 1.255 million versus the expected increase of 0.671 million last week, which places positive pressure on prices, but the markets appear to be driven more by OPEC headlines than inventory data. If the cartel is able to freeze production, the oil market could return to balance by late 2017 and oil prices should stabilize as a result, possibly moving above $50 per barrel. Conversely, if the deal fails, the supply glut could linger throughout next year as oil prices languish below $40. Some form of agreement is expected but the market's reaction will hinge on the credibility of the proposed action. Until then, volatility reigns supreme.
Italy: To ‘Yes’ or ‘No’
On December 4, Italy will go to the polls to decide whether to accept much needed constitutional reforms, but the potential fallout from the referendum reaches beyond its borders. On the financial side, the ‘Yes’ vote is critical for Italy's embattled banking sector, with Unicredit and Banca dei Monte Dei Paschi Di Siena trying to raise billions of euros privately. These efforts could be stalled if reforms are not passed, putting further pressure on the banks. A ‘No’ vote could not only trigger instability in the country, but throughout the Eurozone. It is very likely that Italy's banking problems could become the rest of the world's as contagion spreads into global markets. Furthermore, should reforms be voted down, Italian Prime Minister Renzi has threatened to resign, possibly throwing the country into political turmoil as well. The instability could push the country into the hands of Eurosceptic parties, similar to those that helped nudge Britain to leave the European Union. Should other countries like Italy vote to leave, the Union is likely to crumble and Euro disappear, leaving behind a messy debt-laden Europe.
Fun Story of The Week
Pittsburgh has a problem with a rather unruly inhabitant. Rudy, also known as "Wily", has been a general nuisance to residents on the corner of Robert Street and Wylie Avenue, squatting on properties where he has no business and breaking section 912.07 of the city's code. Unfortunately for Rudy, there is nowhere in Pittsburgh he can go without violating section 912.07 since it prohibits roosters in urban areas and, being a rooster, he probably isn't going to be able to do anything about that. According to the city ordinances, chicks, ducks, goats and a hodgepodge of other farm animals are permitted in the urban setting, however, roosters are strictly verboten, likely due to the crowing. Numerous city inspectors and animal-control agents have failed to bring the suspect in so others are trying their luck, including Frank Cantone, a school resource officer who captures roosters in his spare time. Coming all the way from St. Louis, Missouri, Mr. Cantone plans to capture the elusive rooster by spreading chicken feed and sunflower seeds in an attempt to lure Rudy out in the open, hoping to get him to feed out of his gloved hand. When the moment is right, he'll grab the rooster with the other. Or so he thinks. Mr. Cantone, however, appears extremely motivated, saying that he is "not leaving town until I catch him”.
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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.
The Shanghai Composite is a market composite made up of all the A-shares and B-shares that trade on the Shanghai Stock Exchange.
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.
RUSSELL 2000 INDEX
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
CRUDE OIL VOLATILITY INDEX
The CBOE Crude Oil Volatility Index measures the markets' expectation of 30-day volatility of crude prices by using the implied volatilities of Crude Oil options prices.
Wall Street Journal, November 2016. http://www.wsj.com/articles/pittsburgh-has-a-naughty-rooster-and-nobody-can-catch-him-1479400296
USA Today, November 2016. http://www.usatoday.com/story/money/markets/2016/11/23/asian-stocks-rise-after-dow-hits-record/94325792/
CNBC, November 2016. http://www.cnbc.com/2016/11/22/us-markets.html
Investing, November 2016. http://in.investing.com/economic-calendar/eia-crude-oil-inventories-75
IG, November 2016. https://www.ig.com/uk/italian-referendum-2016
This Is Money, November 2016. http://www.thisismoney.co.uk/money/investing/article-3950022/Italian-referendum-Trump-Brexit-populist-vote.html