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Ta-Ta 2016. Markets Bid Farewell on a High Note as Investors Look to 2017

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December 30, 2016

(Friday Market Open) Investors were preparing to close out a robust year of trading in the early going today that, barring any unforeseen incidents, looked like it would end with the biggest bang in at least two years.

After a tepid trading day Thursday, all three major benchmarks were on track to post solid advances on the month and some with double-digits gains on the year. The majority of Dow Jones Industrials’ (DJIA) stocks ended yesterday’s session to the upside but the index still slipped into negative territory. After a long string of up, up, up action, yesterday’s actions resulted in marginal losses for the second straight day.

Likely to have added a potential pinch of stress to the markets yesterday was the continued tension between the U.S. and Russia after President Obama expelled some 35 Russian diplomats who were thought to be tied to hacking that the administration believes may have had some impact on the presidential elections.

Russia’s foreign minister quickly retaliated, announcing plans to oust 35 American diplomats from Moscow. But, in what news organizations called a “head-spinning turn of events,” President Putin halted that, calling the U.S.’s “unfriendly” measures “provocative.” Even still, he said, there would be no expelling anyone.

The markets barely budged on today’s news, but here’s what investors may want to remember about these types of stories: They are rarely one-day headlines. And although the market reaction was relatively muted, geopolitical stories are often unpredictable.

As it stands in the early going, the DJIA is looking at about a 13% annual gain; the S&P 500 (SPX), led by financials and telecom, started the first quarter of the year off falling deeper than 11% but looks to end it higher by nearly 10%. The Nasdaq Composite (COMP), down 13% in the first quarter, is so far up about 8.5%.

On the docket for today that may nudge markets is the Chicago Purchasing Managers Index (PMI) report for December, which has a tough act to follow from November. That was when the index, known for its tight manufacturing ties and links to the auto industry, climbed to 57.6, its topmost reading in nearly two full years.

Why does this matter? As a bellwether of industrial activity, it may offer insight into next week’s Institute of Supply Management’s (ISM) Index, a key metric of national manufacturing activity that already is riding on three straight months of gains.

And, as the year in trading and investing nears its close, remember this: Get those positions where you want them. Tick, tick, tick.

S&P Chart

TA-TA 2016.

The S&P 500 Index (SPX), plotted here through Thursday on the TD Ameritrade thinkorswim® platform, looks like it may end a rocky 2016 solidly higher by nearly 10%. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Gold Gains; Dollar Doesn’t. The correlation between gold prices and the dollar appeared in full force this week as the price of gold marked its fourth straight day of gains yesterday, scoring its largest advance in nearly three months. The price settled higher by 1.5% at $1.158.10 a troy ounce, its highest level in two weeks.

Meanwhile, the ICE Dollar Index (DXY), which weighs the dollar against a basket of other currencies, slipped 0.5% to $102.67. Gold and the dollar usually move opposite each other. Most gold is traded in dollar denominations, and when the dollar backtracks, it presumably becomes more affordable—and more attractive—for investors who hold other currencies.

There also may be some hedging going on as investors tend to want to cover their bets against gold after its deep summer pullback. Since tipping a high in July, prices are down nearly 16%.

Speaking of Currencies…And a head-spinning turn of events, the Russian ruble was slammed, hitting a three-day low of 61.64 against the greenback amid the tit-for-tat that appeared to be playing out between the Obama and Putin administrations. Support for the Russian currency is seen at about 64.00, analysts say.  

But the move may be short-lived after Putin attempted to calm the tensions early Friday. The ruble appears to be on track to finish the year about 16% higher.

And Then There’s Oil. Worth noting as the year ends is that West Texas Intermediate (WTI) futures were on their own merry-go-round this week. A four-day streak of gains was interrupted yesterday after a surprising gain was reported in domestic crude-oil inventories.

Prices were standing at about $54.21 until the Energy Information Administration reported the 600,000 barrel supply increase. Wall Street was expecting a drop of 1.4 million barrels. In the early going, WTI is off at $53.62. Even with that, oil prices look like they may end the month higher by 8.8% and finishing the year higher by 45%.

Happy New Year,
JJ
@TDAJJKinahan

Economic calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

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JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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