Monday, December 12, 2016

Finishing Strong

Monday, December 12, 2016 - Continued post-election optimism helped elevate the major stock averages to fresh highs on Friday, capping their best week since the presidential election. Amid another record-setting week, the DJIA gained 3.1% while the Nasdaq composite, S&P 500 and Russell 2000 climbed 3.6%, 3.1%, and 5.6% respectively. Several potentially destabilizing events, including the Italian referendum and the ECB's decision to scale back its quantitative easing program, did little to dampen investor enthusiasm for equities. All three major indexes rose on each trading day this week, something that hasn't occurred since September 2011.

These new highs in the major averages powered their index-tracking counterparts to record levels as well. The SPDR Dow Jones Industrial Average ETF (DIA), Powershares QQQ (QQQ), SPDR S&P 500 ETF (SPY), and the iShares Russell 2000 ETF (IWM) all closed the week at their best-ever levels.

Meanwhile, the post-election migration away from defensive assets towards cyclical assets remained in tact. Safe haven assets that gained favor earlier in the year against the backdrop of ultra-low interest rates, sluggish economic growth, and geopolitical uncertainty continued their post-election retreat and suffered large redemptions this week. Three of the year's most popular defensive ETFs, experienced sizable outflows this past week, with the Utilities Select Sector SPRD Fund (XLU), SPDR Gold Trust (GLD), and iShares Edge MSCI Minimum Volatility USA ETF (USMV) bleeding $107.94, $346.95, and $164.63M.

Conversely, money poured into ETFs perceived to benefit from the incoming administration's plans to reduce reduce regulations and taxes and invest heavily in infrastructure. Adding to their post-election gains, the Financial Select Sector SPDR Fund (XLF), Industrial Select Sector SPDR Fund (XLI), and iShares Transportation Average ETF (IYT) attracted $264.96, $330.64, and $41.50M of inflows.

The sustainability of this rally will face a key test as the FOMC gathers for its December meeting this week. While a rate hike is almost universally expected, the pace in which the Fed plans to pursue monetary tightening will have important implications for whether or not the stock market will be able to maintain its bullish momentum.

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