AdvisorShares Weekly Market Review – Week Ending 11/25/2016
Highlights of the Prior Week
Market Melting Up
Domestic equity markets had a very quiet holiday week and by quiet we mean moving higher on very little volume. For the four days the Dow Jones Industrial Average gained 1.47%, the S&P 500 was up 1.40%, the NASDAQ was good for a very similar 1.42% while the Russell 2000 continued its recent trend of substantial outperformance, jumping 2.37%. Since the election markets are generally up 3-4% but the Russell 2000 has added on more than 12%. The rally is being attributed in part to the rising dollar and rising interest rates and while small caps are clearly overbought we would not attempt to guess when this run will peter out but it might make sense to rebalance if we see another couple hundred basis points of alpha added. Barron’s Striking Price column chimed in on the rally observing that the market appears to be pricing in “Trump perfection.” If that is correct and perfection is not achieved it will bring back two-way volatility shortly after the inauguration. (we would note a half dozen other articles in the current Barron’s expecting the rally to continue).
The other trend that continued last week was the move higher for interest rates albeit at a slower pace than a couple of weeks ago. The yield on the Ten Year US Treasury Note moved up four basis points last week to 2.37%. The bond market is clearly pricing in something or a few things like Fed rate hikes, better growth prospects and perhaps a favorable growth delta for the US versus foreign markets. The market may not necessarily turn out to be correct (reference the Taper Tantrum of 2013) but the move has been swift and for poorly positioned portfolios, it has been painful.
Foreign equity markets have generally not fared as well since the election. Many had an immediate bounce on the day after election but then generally have trended flat. The DAX is up 2.07% since the election, the CAC 40 has gained 1.63%, the FTSE 100 has declined three basis points, the Shanghai Composite has hung in there as it has rallied 3.62%, the Hang Seng has dipped 0.81% and the KOSPI in Seoul is down 1.44%. The real standout has been the Nikkei 225 which has rocketed higher by more than 7% as the dollar has gained 7% at the yen’s expense and the JGB yield remained in positive territory last week after months with a negative yield.
Looking elsewhere, the German bund yield fell a little more, to 0.24%, the French OAT moved slightly higher to 0.79%, the UK gilt now pays 1.41% and the Swiss ten year moved slightly further into negative territory, charging 16 basis points. Global rates have moved quite a bit higher in the last month and while an outcome of better payouts for investors and savers will be welcomed, the path to get there would be rough.
West Texas Intermediate Crude did not have much of a net change on the week but did sell off 2% on Friday after the Saudis said threatened to not attend a scheduled OPEC meeting today which has swung the pendulum back to no production cut. The price continues to be held hostage by this issue and ongoing volatility is a reasonable expectation. This market could become even more complicated if the new President follows through on his previously stated intention of being driller-friendly with the thinking being that more supply comes online which would put downward pressure on the price of crude.
For the last couple of weeks we have puzzled over Credit Suisse’s decision to close and/or delist ETNs with hundreds of millions of assets in them. ETF.com thinks they have figured out why this is happening;
“It’s become clear that Credit Suisse is trying to clean up its balance sheet,” explained Dave Nadig, CEO of ETF.com. “Since these products are large and therefore probably quite profitable, it’s not a ‘pruning’ exercise. And because the underlyings are oil, there’s zero chance this is an inability-to-hedge problem. The only remaining reason to shutter them is to clean up the liabilities on their balance sheets.”
ETF.com goes on to point out that while ETNs do offer tax advantages in some instances, investing in unsecured debt that promises to track a certain market is becoming an increasingly difficult proposition to market.
Have a little fun with The Ten Strangest Firetrucks Ever Built from Jalopnik including a tank, a golf cart and a Rolls Royce;
How did you put out 2,000 degree Fahrenheit oil fires back when Saddam was lighting Kuwaiti wells in 1991? You strapped two MiG-21 jet fighter engines onto a WWII-era Soviet T-34 tank and blew the living crap out of the fire. Technically, you fired six water hoses at the fire and then ran the jet engines through the stream, creating a blast of high-powered steam, which severed the stream of oil from where it ignites above ground.
As the college football bowl season is just around the corner, ESPN reports that Teams Below .500 Will Be Needed Again;
There are 80 bowl slots to fill, and Saturday’s games brought the number of bowl-eligible teams to 74. That’s not including Army, which is 6-5 but can count only one of its two wins over FCS teams toward bowl eligibility. Louisiana-Lafayette (5-6) and South Alabama (5-6) can still reach .500, but even if those two teams and Army all make bowls, there will be some sub-.500 teams needed to fill spots. Louisiana-Lafayette plays at Louisiana-Monroe next weekend, and South Alabama hosts New Mexico State.
As for the sectors of the S&P 500, six outperformed the broad benchmark – Telecom, Materials, Industrials, Discretionary, Energy, and Utilities. The remaining five – Staples, Real Estate, Financials, Technology, and Healthcare – each underperformed. The dispersion between the top-performing and bottom-performing sectors was roughly 5.01% for the week ending 11/25/16, with Telecom outperforming all, and Healthcare coming in last.
For November 21th, 2016 to November 25th, 2016
As measured by the S&P 500 sector indices, respective performances were: