Market Review: December 29, 2017

Terrie AmengualDaily Market Report

Closing Recap
Friday, December 29, 2017

Equity Market Recap

·      U.S. stocks quietly slipped on the final day of trading for 2017, but it certainly was a banner year filled with global record highs for various stock markets. The Dow Industrial Average did not post its 72nd record closing high of the year today, but its 71st reached yesterday was the most in a calendar year (topping the 69 mark prior).  Weakness in Dow components AAPL (after apologizing for slowing older phone batteries) and GS (after the bank said its Q4 earnings would take a $5 billion hit related to the tax overhaul), weighed on the Dow today. However, it has been a year filled with strong economic growth, solid corporate earnings and low interest rates. The dollar was a big underperformer this year, falling about 10%, while commodities such as gold (up 12%) and oil (up 12%) benefitted from the greenback weakness. The yield on the 10-year Treasury ended near last year’s closing levels, while excitement in crypto-currencies dominated the news the last few months of the year (and surely to continue into 2018). In the end, the S&P 500 posted an annual return of about 20%, the Dow 25% and the Nasdaq Comp outperformed, rising 29% (all three indexes posting their best performances since 2013. There was no fear throughout the year as indicative of the CBOE Volatility Index (VIX), ending the year not far off record lows, despite tensions in North Korea and political upheavals in Washington. In one of the more interesting stats, according to Reuters, the S&P has closed below 1% only four times this year.  We head into the New Year with the Trump administration passing the tax reform bill last week, and attention now turns to infrastructure spending and healthcare.

Commodities

·      Oil prices close higher, with WTI crude rising 58c, or 0.97% to settle at $60.42 per barrel, rising 12% for 2017 and ending at fresh 2 ½ year highs following mixed inventory data yesterday and a falling dollar making commodity prices more attractive. Oil prices got a boost this year on accommodative OPEC meetings, agreeing to extend production cuts another 9-months at its last meeting in November. Natural gas prices rose for the third day in a row getting a lift amid cold weather across much of the U.S, though prices remain lower for the year. Colder-than-average temperatures are expected through the central and eastern parts of the nation over the next five days. Futures for February delivery gained 3.9 cents, or 1.3%, to $2.953 per mln Btu, its highest close since Dec. 1st, but ends the year lower.

·      Gold prices settle higher at $1,309.30 an ounce (a 3-month high), rising $12.10, or 0.9%, and rising around 12% for 2017, its best annual return since 2010. With today’s gains, gold wrapped 2017 with a 7-day winning streak, its longest since July. Silver prices settle at $17.15, rising 5% from 2016. The gains come amid weakness in the U.S. dollar. Gold had topped out above $1,355 an ounce in early September before sliding to lows around $1,240 an ounce on December 12th, but has risen stealthily the last few weeks. Copper prices slipped, snapping a 16-day win streak after touching 4-year highs yesterday as strong demand from China and supply disruptions have buoyed prices throughout the year.

Currencies

·      It was a rough day (and week and year) for the U.S. dollar, with the ICE Dollar index (DXY) falling to fresh 3-month lows, slipping to 92.08 low (before paring losses) and posting a yearly decline of around 9%. The euro broke above the $1.20 level against the dollar for the first time since Sept 22nd and ends the year higher by over 11% against the greenback (its best annual return since 2003). In crypto currencies, much of the focus in 2017 has been on the stratospheric ascent of bitcoin up about 1,400% so far in 2017 in recent trade, but many others have come to light as well (Litecoin, Ripple and Ethereum) – surely to remain a hot topic in 2018.

Bond Market

·      Bonds little changed on the day as yields end mostly higher for the year; the yield on the 10-yr ends little changed from 2016 close, despite lots of volatility in between; the 10-yr yield fell to lows around 1.6% earlier this year before settling back around 2.43% today (from 2.44% close in 2016); the 2-yr note yield is up about 70 bps this year and at highest levels since 2008 at 1.89%; 5-yr note yield up about 29 bps this year at 2.22% (from 1.93% 2016 close). The bond market closed early today (2:00 PM EST) and will be closed on Monday for New Year’s. Even three interest-rate hikes by the FOMC failed to push up the 10-year yield.

Other Interesting tidbits

·      Top S&P 500 gainers in 2017: ALGN +135%, NRG +130%, VRTX 105%, WYNN +93%, BA +90%, DHI +87%, PYPL +87%, MU +86%, NVDA +83% and PHM +82%

·      Top S&P 500 decliners in 2017: BHGE -52%, RRC -49%, UAA -47%, SCG -45%, EVHC -45%, UA -44%, GE -44%, MAT -43%, CHK -42%, and AAP -40%

·      2017 sector winners (as per CNBC): Homebuilders up 59%, Semiconductors 38%, Copper/miners 37% and Aerospace & Defense 32%, with sector laggards including: oil services (-19%), E&P (-9%) and Telecom (-7%)

·      2017 Global Market winners (as per CNBC): Argentina +54%, Vietnam +48% YTD, Chile +40%, Hong Kong +36%, India +27%, Brazil +26%, Germany +13%

Sector News Breakdown

Energy

  • Energy stocks had a good week with oil prices rising back above 2-year highs on a weaker dollar and mixed inventory (bigger draws in oil inventories but gasoline bigger builds). Oil prices got a boost this year on accommodative OPEC meetings, agreeing to extend production cuts another 9-months at its last meeting in November.  Shares of Dow component CVX ends the year near 52-week highs while fellow Dow component XOM lags, down about 7% YTD. E&P and Natural gas leveraged stocks were among the biggest decliners in the S&P this year (CHK, RRC, BHGE). US crude output reaches 46-year high of 9.64M b/d in October
  • In stock news; Bonanza Creek Energy (BCEI) announced that it has agreed to terminate its previously announced agreement to merge with SandRidge Energy (SD). After consultation with SandRidge’s largest shareholders, SandRidge’s board concluded that it would not receive approval for the transaction at its planned special meeting; the Baker Hughes (BHGE) weekly rig count showed total rigs fell -2 to 929, with oil rigs unchanged at 747, and gas rigs down -2 to 184

Financials

  • Banks; a strong end to the year for banks, insurers and consumer finance stocks (DFS, SYF, COF) on expectations the tax bill passed last week out of Washington will help balance sheets due to lower corporate tax rate, while a rising rate environment by the Fed will also help boost lending margins. Weaker trading revenues were an overhang for the banks/brokers this year, but positive sentiment on above items and expected reduced regulation remains key
  • Tax implications; GS reports a $5B cut in 4Q and year earnings, citing Tax Law saying about 2/3rds due to repatriation tax in 8-K; SIVB sees some tax-related assets value cut about $32M-$37M citing the reduction in the corporate tax rate
  • Stock movers; GCAP shares add on to yesterday gains after Mox Reports positive on shares, saying yesterday that the company’s shares may triple after global bitcoin rollout, which is expected to be announced within weeks

Healthcare

  • Pharma movers; AZN and NVO were both upgraded at JP Morgan today; PGNX active after the company said the U.S. FDA has accepted for review its new drug application for Azedra in patients with rare neuroendocrine tumors; ATRA received FDA clearance to start two Phase 3 clinical studies with tabelecleucel in patients with rituximab-refractory Epstein-Barr virus associated post-transplant lymphoproliferative disorder
  • Biotech; JMP Securities said major increase in FDA approvals, plus a bit of M&A, drive the biotech sector to second best performance of all S&P sectors in 2017 – what are the ingredients for success in 2018? Much like the year that will have soon preceded it, we believe 2018 will be full of challenges. Despite new all-time highs on the BTK, the NBI lagged its fellow index by a wide margin (33.8% return on the BTK vs. 20.7% for the NBI).

Industrials & Materials

  • Transports; the index slumped on the day, coming off record all-time highs of 10,740 on December 26th and is up over 17% Year-to-date, led by top gainers for the year rails: CSX +53%, NSC 34%, as well as FDX +34% and LUV 31% (also rails UNP +30% and KSU +24%); lone decliners in the transport index ALK -16%, MATX -14% and UAL -7%
  • Metals & Mining; steel sector positive mention at Jefferies saying U.S. scrap prices should rise up to $30/ton sequentially, with sentiment for steelmakers positive into the New Year (X, AKS, STLD, NUE); copper prices end the year strong, closing around 4-year highs (FCX 52-week highs this week); gold miners with good rally late year after stealth rally in gold back to $1,300 an ounce

Technology, Media & Telecom

  • Internet; AMZN active after President Trump, in a tweet earlier today, calls for the U.S. Post Office to raise price of shipments, including those made by AMZN; NFLX announced higher salaries for executives after tax cut plan passage
  • Semi’s, Software & Services; SYNT was downgraded to underperform at Wells Fargo with $21 tgt saying weak positioning for IT demand shift from low-cost offshore-centric software services to more onshore-necessary digital solutions is likely to drag on growth and margin outlook; UCTT shares active as will replace SGMS in the S&P SmallCap 600 effective January 3rd
  • Hardware & Equipment; ADTN shares dropped as they guide Q4 EPS 1c on revs $125M, below prior view $155M-$165M (est. 18c/$161.4M); AAPL apologizes for IPhone performance cuts to extend battery and cuts the price of new batteries; TIVO received multiple expressions of interest for just more than $20 a share from potential private equity buyers, though it hasn’t launched a strategic review process https://goo.gl/6s9gfj
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Market commentary provided by Hammerstone Markets, a division The Hammerstone Group, a firm separate from and not affiliated with Regal Securities L.P.  Regal Securities L.P. has not participated in the creation of the content, and does not explicitly or implicitly endorse the content.

 

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