Monthly Market Update for December 2016

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Please find the next blog in our monthly series that provides timely market data as well as perspectives on the current state of the economy and the global financial markets.

Global Economy:

Recent economic indicators showed momentum was building in US manufacturing.  Latest results indicate that activity is broadening outside the US consumer who has served as the primary engine of growth in 2016.  The services sector, that represents a much larger share of the economy, continued to expand, while another month of job gains helped drive consumer confidence back to pre-recessionary levels.

The Commerce Department’s final estimate of third quarter real gross domestic product placed the rate at an annualized 3.5%, the strongest in two years.  This follows a 1.4% pace in the second quarter.  Nonresidential fixed investment, consumer spending, and state and local government spending increased more than previously estimated.   Additionally, a key gauge of US manufacturing activity showed the sector expanded in December, as production climbed to an almost two-year high, amid improving new orders.  Similarly, the US service industries that includes retail and healthcare, strengthened as a measure of the group’s business activity jumped to the highest level in over a year.

The economy added 156,000 jobs in December, and for 2016, employers added an average 180,000 per month to payrolls.  The unemployment rate rose to 4.7% from 4.6% as the size of the labor force increased with the participation rate inching higher to 62.7% from 62.6%.  Labor costs appeared to be intensifying, as average hourly earnings reached a new cyclical high in December, with year-over-year growth accelerating to 2.9%, the highest since the last recession ended in June 2009.  The Federal Reserve (Fed) took steps to normalize interest rates, hiking for the first time in 2016, raising its benchmark Fed funds rate 0.25% to a target range of 0.50% – 0.75%.  However, it maintained its view that future rate hikes are likely to remain at a gradual pace.

Global Markets:

Equity markets rallied in December amid investor optimism that the recently elected US administration’s plans to cut taxes, ease regulation, and boost fiscal spending were seen as positive for domestic growth, benefiting the world’s largest economy.  For the month, the S&P 500 gained 2.0% as nine of the eleven sectors moved higher, up from seven in November.  Telecommunication services was the top performer, gaining 8.1% for the month amid expectations of easier regulations in 2017.  Energy stocks added 1.8% as major oil producing nations announced supply cuts.  Utility companies rose 4.6%.  Material and consumer discretionary companies were slightly lower.  US small cap stocks jumped 2.8% to conclude a very strong 2016, while mid cap stocks rose 1.1%.

Stocks moved higher globally, as the MSCI All Country World index gained 2.2%, and the MSCI All Country World index ex-US rose 2.6%.  Euro area stocks advanced, after the European Central Bank (ECB) extended its quantitative easing program through December 2017, despite cutting monthly purchases to 60 billion euros from 80 billion euros starting in April 2017.  The MSCI Europe index climbed 5.3%.  Japanese stocks gained 1.0%.

Emerging market equities initially came under pressure during December as investors weighed the prospects of tighter Fed policy, thereby reducing the appeal of the asset class.  However, by month end, emerging markets had moved into positive territory, closing the month with a slight gain of 0.3%.  On a regional basis, emerging market equities in Eastern Europe climbed 11.2%, and emerging market equities in Asia were slightly lower.

The Bloomberg commodities index rose 1.8% in December, boosted by the energy segment, with oil prices rising 8.7% offsetting a decline of 1.6% in gold prices.

In the domestic bond market, US Treasury (UST) yields rose following the Fed interest rate hike and amid rising inflation expectations.  Short dated UST yields climbed and yields on five year notes rose 9 basis points (bps) to 1.93%, the highest since 2011.  Benchmark 10-year yields traded to an intraday high of 2.64% on December 15, but as rates ultimately softened in the final two weeks of the year, this closely watched indicator finished just 6 bps higher for the month to close at 2.45%.  The BloomBar US Treasury index fell 0.11% and the BloomBar Aggregate index gained 0.14%, even while average yields rose to 2.61% from 2.57% in November.  US investment grade corporate average yields were unchanged at 3.37%, with investor demand for yield producing spread tightening that effectively offset rising rates.  Investment grade bonds rebounded somewhat from November’s losses, climbing 0.7% in December.  High yield corporate average yields narrowed 45 bps to 6.12%, helping “junk” bonds rally 1.9%.  Municipal bonds recovered some of their recent losses, climbing 1.2% for the month.

European bond markets advanced following the European Central Bank’s decision to extend its monthly bond purchases to the end of 2017.  The yield on Germany’s benchmark 10-year bund declined 7 bps to 0.21% from 0.28% in November.  Likewise, Italian 10-year yields fell 17 bps to 1.82%, while Spanish 10-year yields declined 17 bps to 1.38%.  The Bank of Japan remained committed to easy monetary policy and will keep expanding the monetary base until inflation is above 2%, as Japan’s 10-year yield rose 2 bps to 0.05%.  USD denominated emerging market bonds gained in December as the JPMorgan EMBI Global bond index rose 1.4%.  The premium investors demand to own emerging market bonds rather than US Treasuries narrowed to 365 bps from 388 bps in November.

Disclaimers: The data contained in this report is provided from Asset Consulting Group (ACG).  This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources. HighTower/GFP shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Securities are offered through HighTower Securities, LLC, member FINRA/SIPC/MSRB. HighTower Advisors, LLC is a SEC registered investment adviser.

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