Domestic equities continued their post-election rally, spurring most of the major benchmarks to all-time highs. Small-cap companies, which are typically more volatile, built on their lead for the year-to-date and performed best during the week. The technology-heavy Nasdaq Composite Index established a new record early Friday but fell back in late trading and ended the week slightly lower.
Financials continued to outperform at the start of the week, helped by a myriad of factors. Higher bond yields boosting lending margins, the anticipation of less regulation, a better growth outlook – all work in favor of banks and insurance companies. These recent market movers gave back some of the gains at midweek, unfortunately, as profit taking followed several analysts' downgrades based on less attractive valuations.
While the impact of a Trump administration on the financial sector is relatively clear, other segments remained uncertain. In healthcare, for example, investors have little clarity as to whether the Affordable Care Act will be amended or repealed and whether the new administration will try to clamp down on drug price increases.
Regarding the overall outlook for the economy, uncertainty remains. While a reasonable base case expectation for growth in 2017 may still be 2%, the odds have increased that the economy will be either markedly stronger or weaker. In the short term, the economic picture remained relatively bright, according to the week's economic reports. Retail sales rose solidly in October, and housing starts shot up 25%, with new housing permits seeing their best monthly rise since 1982. Weekly jobless claims also set a favorable multi-decade record by falling to a 43-year low. All good news there.
In testimony before Congress on Thursday, Federal Reserve Chair Janet Yellen seemed to confirm that recent economic signals have been strong enough to prompt the Fed to raise rates at its December 13–14 meeting, noting an increase might come “relatively soon.” Fed funds futures after the Chair’s testimony were pricing in the chance of a December increase at 98%. Meanwhile, longer-maturity Treasury bond yields continued climbing, bringing them to their highest levels in a year. Treasury bond prices fell as a result, and municipal bonds fared somewhat worse.
European stocks closed the week flat to slightly lower, with Italy and Spain recording steep declines. Utilities, energy, and basic materials shares dragged, hurt largely by U.S. dollar strength. The euro ended lower for the week against the dollar, extending its longest losing streak since it started trading in December 1999. Interestingly, there was good earnings news as nearly 60% of the companies in the pan-European benchmark Stoxx 600 beat earnings estimates. Quarterly earnings season has largely come to a close.
As markets noted with keen interest, President-elect Trump met with Prime Minister Shinzo Abe on Thursday. Abe’s goal is to salvage at least part of the Trans-Pacific Partnership (TPP), a 12-nation trade agreement that is important to the prime minister’s economic agenda. During Trump’s campaign, he pledged reject trade deals that move jobs overseas, and he has a history of harshly criticizing Japan’s trade policies. However, it may be too early to know what impact the Trump administration will have on east Asia, although the appointment of his foreign policy team will provide some clues.
Finally, emerging markets equities and bonds have been hampered by large investor outflows since the U.S. presidential election. The week’s data from EPFR Global, which tracks global fund flows, showed a record of more than $6.6 billion leaving emerging markets debt products. It should be noted that while the asset class has certainly been weak following Trump’s victory, it has held up surprisingly well given the huge volume of outflows.