The S&P 500 skyrocketed 3.08% for the week, to close on Friday at an all-time high of 2,259.53, led to the upside by the Financials and Information technology sectors. The Financials sector got a big boost from the steepening yield curve, as the widening spread between short-term and long-term yields increases the profit margins of financial companies.
The yield spread between the 10-year and 2-year U.S. Treasury Notes has jumped over 30% since Trump’s surprise victory, while the Financials sector is up about 19%. The top winner so far is Goldman Sachs Group Inc. (NYSE:GS), up 33.4% since November 8. President-elect Donald Trump has promised to repeal the Dodd–Frank Wall Street Reform and Consumer Protection Act and has chosen three Goldman executives to join his cabinet.
The S&P 500 was dragged down during the week by the Healthcare and Industrials sectors, after an interview published on Wednesday in Time magazine that quoted Donald Trump saying, "I'm going to bring down drug prices," … "I don't like what has happened with drug prices." Shares of defense companies in the Industrials sector, including Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC), Raytheon (NYSE:RTN) and General Dynamics (NYSE:GD) were selling off after Trump sent out a tweet, Donald J. Trump @realDonaldTrump “Boeing is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!”, 5:52 AM - 6 Dec 2016.
In our view, the U.S. market has already priced in Trump’s promised pro-growth policies, which include a large tax cut and as much as $1 trillion in spending on infrastructure. Here are some Wall Street views on what should happen next with Trump’s fiscal stimulus plans. Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Merrill Lynch, told CNBC on Wednesday that she remains bullish as long as, “We get stimulus. We get tax cuts. We get, you know, slowly rising interest rates”, or else the U.S. could be heading into a recession if policymakers fail to deliver or the U.S. gets the negative side of the policy proposals.
Deutsche Bank equity strategist David Bianco wrote in a note to clients on Wednesday, "To maximize the stimulus from a corporate tax rate cut we believe it must be: significant, speedy and simple. If the corp tax rate cut is to be applied to full 2017, as we expect, then passing the legislation ASAP provides the most bang for the forgone 2017 tax revenue buck,", according to CNBC.
For the week, the U.S. Dollar index (DXY), essentially the USD/EUR exchange rate, rose 0.63% to close at 101.50, despite the Italian referendum vote over the weekend and the ECB meeting on Thursday. The yield of 10-year U.S. Treasury Notes gained another 3.1% this week to close at 2.466% on Friday, while the yield spread between the 10-year and 2-year U.S. Treasury Notes widened to 1.32 percentage points, a 52-week high. The 10-year JGB yield jumped 40% to 0.056% at the close on Friday, while the 10-year German bund yield surged over 30%, to close at 0.366%.
Traders were dumping longer-dated U.S. Treasury securities and longer-dated European bonds, including those issued by the eurozone’s weaker economies — Italy, Spain and Portugal, after the ECB’s Mario Draghi said on Thursday that it will start buying bonds with one-year maturity, which currently carry a negative yield. Previously, the shortest maturity allowed for bonds was two years. The market was also surprised that the ECB decided to reduce its monthly bond purchases from their current level of €80 billion a month to €60 billion a month, starting in April, while saying the program would be extended until the end of next year.
The WTI crude price dropped 0.35% this week, to close at $51.50 per barrel on Friday, while the Brent crude spot price inched 0.15% lower to close at $54.40 per barrel, ahead of the meeting between OPEC members and non-OPEC countries on December 10 in Moscow to finalize the deal of their output in the next six months. The market is expecting a 600,000 barrels per day (bpd) cut from the non-OPEC countries. Russia has already committed to reduce 300,000 bpd from its production in the first half of 2017.
The EIA weekly U.S. oil inventory report on Wednesday showed that domestic crude supplies fell by 2.4 million to 485.8 million barrels, excluding the Strategic Petroleum Reserve, in the week ending December 2, compared to S&P Global Platts analysts’ expectations for a decline of 1.7 million barrels. The American Petroleum Institute (API) inventory data on Tuesday showed a U.S. crude inventory decrease of 2.2 million barrels.
The EIA also said that gasoline supplies climbed by 3.4 million barrels and distillate stockpiles rose 2.5 million barrels, exceeding analysts’ expectations of 900,000 barrels for gasoline and 100,000 barrels for distillates. A larger-than-expected build in distillate supplies sent the WTI crude price tumbling 2.3% as traders see less demand for crude oil in coming weeks.
Separately, the EIA said the weekly U.S. crude oil production declined 2,000 bpd for the week ending December 2, to 8.697 million bpd. Weekly U.S. crude oil output has fallen about 9.5% from the peak level of 9.61 million bpd during the week ending June 5, 2015. Houston-based oilfield services company Baker Hughes Inc. said on Friday that the U.S. oil rig count jumped by 21 to 498, compared to 316, when the rig count hit the low on June 6, 2016.
The best performing S&P 500 sectors for the week were Financials and Information technology, up 4.82% and 4.24%, respectively. The worst performing sectors for the week were Healthcare and Industrials up 1.89% and 0.65%, respectively.
S&P 500 Summary: +10.55% YTD as of 12/09/16
Barclay Hedge Fund Index: +5.29% YTD
Outperforming Sectors: Energy +24.59% YTD, Financials +22.20% YTD, Industrials +18.73% YTD, Materials +17.69% YTD, Telecommunication services +13.11% YTD and Information technology +12.85% YTD.
Underperforming Sectors: Utilities +9.89% YTD, Consumer discretionary +7.52% YTD, Consumer staples +2.51% YTD, Healthcare –4.74% YTD, and Real Estate –7.48%