PMC Weekly Review - January 6, 2017

A Macro View – December Monthly Recap

Domestic equity markets closed out 2016 with strong gains in December, as investors continued to ride out the rally triggered by the election of Donald Trump in November. On December 14, the Federal Open Market Committee (FOMC) voted unanimously to raise the federal funds rate 25 basis points to a range of 0.50%-0.75%. Investors began pricing in the higher likelihood of a Fed rate hike over the past few months, which reached near certainty in the month leading up to December’s FOMC meeting. Approaching the meeting, speculation ensued on how many rate increases to expect in 2017, with the release of post-meeting economic forecasts indicating three hikes for the year ahead. The employment situation continued to show growth with another year of two million jobs added to the labor market. In December, employers added 156,000 jobs, and the unemployment rate rose slightly to 4.7%. The final estimate of third-quarter GDP was reported at +3.5%, an increase from +1.4% in the second quarter, showing continued economic growth.

Within this context, domestic equities were mostly higher during the month. The S&P 500 gained +1.98%, finishing the full year up +12%. The Dow Jones Industrial Average (DJIA) also advanced, delivering a gain of +3.4% and leading the major averages. The DJIA flirted with a key psychological level of 20,000 several times before falling just short with a few down days to close out 2016. The tech-heavy Nasdaq Composite Index rose by +1.2%, finishing the year up 8.9%. The Russell 2000 Index of small cap stocks outperformed the Russell 1000 Index of large cap stocks, with a monthly return of 2.8% compared with 1.9%. Value stocks outperformed growth stocks, and for the full year, outperformed by more than 1,100 basis points within the Russell 3000. In terms of sector performance, the top performers in the month were Telecommunications, Financials, and Utilities, with returns of +8.1%, +3.9%, and +4.9%, respectively. Consumer Discretionary, Materials, and Industrials were the poorest performers, with returns of +0.06%, +0.1%, and +0.5%, respectively. Commodity prices increased by +1.8%. REITs bounced back, gaining 4.7%, after posting poor performance in November.

International equity markets bounced back in December, after a difficult November, with most markets outperforming US equities. The international market movement over the past two months could be viewed as an overreaction followed by a snapback in several regions. The MSCI World ex-U.S. Index increased by +3.3% for the month, and finished the year up +2.8%. Emerging markets performed poorly on a relative basis, largely as a result of the rise in interest rates. The MSCI Emerging Markets Index posted a gain of +0.2% for the month, finishing up 11.2% for 2016. The MSCI EAFE Index, which measures developed markets performance, gained +3.4%. Regionally, Eastern Europe and Europe were the best relative performers, with returns of +11.1% and +5.2%, respectively. China, Asia EM, and Asia Pacific region ex-Japan were the poorest relative performers, with declines of -4.1%, -1.4%, and -0.6%, respectively.

Fixed-income markets improved in December, after a challenging November, with investors fully pricing in a December rate hike one month early. For the fourth quarter, losses were still somewhat steep, as the Bloomberg Barclays U.S. Aggregate Bond lost -3% in Q4 and declined 2.65% for the full year. The yield curve was relatively unchanged in December, with both short- and long-term yields rising only slightly but in tandem. This was a much less significant move than in November, when the yield curve steepened substantially following the election and the pricing in of a FOMC rate hike. Within this environment, the yield on the 10-year U.S. Treasury Note ended the month at 2.45%, up 7 basis points from the 2.38% level of November 30. Broad-based fixed income indices eked out slight gains, with the Bloomberg Barclays U.S. Aggregate Bond Index increasing 0.14% for the month. Global fixed income markets performed worse, as the Bloomberg Barclays Global Aggregate ex-U.S. Index declined -1%. Intermediate-term corporate bonds posted slight gains, as the Bloomberg Barclays U.S. Corporate 5-10 Year Index rose by +0.3%. The Bloomberg Barclays U.S. Corporate High Yield Index increased by +1.85%. Municipals posted a gain of +1.2% for December.

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