Investment Commentary –October 26th, 2016
Market Indices as of Market Close October 26th, 2016
Dow 18,202 (4.46% YTD)
S&P 2,144 (4.91% YTD)
NASDAQ 5,246 (4.77% YTD)
Global DOW 2,452 (2,033 week low/high 2,489)
10-year Treasury 1.74 (1.32 52 week low /2.38 high)
Gold 1,270 ($1,053 52 week low /high $1,384)
Oil $51.44 ($34.10 52 week low /high $53.39)
Dow closes higher as Apple slide drags S&P 500, Nasdaq lower
The Dow industrials closed higher Wednesday even as a slide in Apple Inc. shares led the S&P 500 and Nasdaq to finish lower. The Dow Jones Industrial Average DJIA, +0.17% rose 30.06 points, or 0.2%, to close at 18,199.33, boosted by a big 4.7% gain in Boeing Co. BA, -0.10% shares but capped by a 2.2% slide in Apple AAPL, +0.02% shares. The S&P 500 Index SPX, -0.17% closed down 3.73 points, or 0.2%, at 2,139.43, as the real estate, health care and telecom sectors weighed on the index. The Nasdaq Composite index COMP, -0.63% fell 33.13 points, or 0.6%, to close at 5,250.27. Apple shares sank as quarterly revenue missed Wall Street estimates late Tuesday and projections were not as bullish as expected.
Lord Abbett Perspective: An Early Look Ahead to 2017
Here’s an advance look at macroeconomic and investment trends to watch next year.
Even though it’s not yet Halloween, we already have started receiving requests for our views on prospects for various asset classes in the coming calendar year.
Perhaps these early inquiries are a by-product of the uncertainty created by a contentious U.S. presidential election and questions surrounding monetary policy in the United States, Japan, and the European Union.
Of course, as we do every year, Lord Abbett will publish in the coming weeks a full package of 2017 outlooks for the U.S. and global economies, U.S. equities, U.S. fixed income, municipal bonds, and international investments. Right now, though, in answer to advisor and investor queries, we will offer a brief look ahead at 2017.
The Macro Picture
Investment opportunities through 2017 will be influenced by global economic and policy developments. Global growth outside the United States likely will struggle in 2017, as the United Kingdom addresses the consequences of its “Brexit” vote to leave the European Union (EU), as the EU contends with problematic banks, as Japan struggles to overcome deflation and zero growth, and as China tries to balance excessive debt with overcapacity and weak exports. To combat slow growth, the United Kingdom, the European Union, and Japan will continue to embrace “lower for longer” monetary policy supported by aggressive central bank securities purchases. Weaker currencies relative to the U.S. dollar are likely to result.
More favorable gross domestic product growth in the United States of 2.0–2.5% likely will be supported by continued jobs growth, rising wages, and possibly a boost in infrastructure spending.
In such an environment, small- and mid-cap equities that tend to be more U.S.-centric should offer relatively attractive opportunities for earnings growth. U.S.-based international companies with greater dependence on a global economy that is likely to be sluggish and foreign earnings that are likely to be weaker as a result of dollar strength seem positioned to face greater headwinds to earnings growth. Slow global growth and low yields also suggest that U.S. companies that demonstrate an ability to consistently grow dividends should continue to receive demand from yield-starved investors.
U.S. Fixed Income
Among fixed-income securities, reasonable U.S. economic growth, combined with the likelihood of one rate hike from the U.S. Federal Reserve (Fed) at the end of 2016 and two more in 2017, should favor shorter maturities and lower-quality credits over longer-term high-quality securities.
High yield: U.S. high-yield securities seem, to us, fairly priced at yield spreads close to their long-term median and default rates (based on J.P. Morgan data and excluding energy and mining companies) at only 0.53%. Perpetuation of low yields by non-U.S. monetary policies should encourage support of U.S. high yield by global investors.
Floating rate: Bank loans that dominate floating-rate funds are attractive for similar reasons, with the potential for additional yield adjustment as the Fed gradually pursues higher rates.
Higher-quality bonds: Investors seeking a tilt toward higher quality may find a diversified one- to three-year portfolio of corporate securities, commercial mortgage-backed securities, asset-backed securities, U.S. agency obligations—along with an allotment to high-yield securities—can provide relatively attractive yield to compound in an era of lower rates, while offering relatively low duration risk as the Fed gradually pursues higher rates.
Municipal bonds: The U.S. municipal market continues to compare favorably with equivalent credits and maturities in the taxable market. In addition, supply and demand factors in the muni market suggest an attractive environment for investors. According to Reuters, year-to-date new issuance of municipal securities, through September 30, 2016, is up less than 5% from the same period in 2015 ($334 billion versus $319 billion), while municipal bond mutual fund inflows, according to ICI data, multiplied, from $6.6 billion in the 2015 period to more than $55.0 billion in 2016. With growing interest in an asset class that is generally unaffected by global volatility, continued technical strength in municipal bonds may offer investors a relative oasis as we enter 2017.
THIS DAY IN FINANCIAL HISTORY: October 26th, 1980 Giant Losses
The auto industry endured hard times as General Motors announced a $567 million loss during the previous quarter; this was the biggest quarterly drop ever posted by an American company.
The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.
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