After a historic week, markets get back to the business of watching the Federal Reserve and economic data — but with a very new perspective.
Donald Trump's surprise victory in a tight presidential election defied Wall Street expectations, not only regarding who would lead the country, but the market's reaction to that leader. Instead of latching onto the uncertainties, the market vaulted higher on the president-elect's promise of changing the tax code and launching a huge spending program to stimulate the economy. Interest rates rose and market talk turned to inflation and higher growth.
Trump's transition will be a big focus for markets in the week ahead, and of particular interest will be any guidance on whom he plans to name for key Cabinet jobs. Some of those names could be market moving, given the emphasis during the campaign on things like trade and deregulation. There is also a busy economic calendar, with the highlights both Tuesday's retail sales report and CPI inflation data Thursday.
The retail sales data and also the comments from merchants, who report earnings during the week, could provide important insights into how consumers weathered the election season. Retailers reporting earnings include Home Depot on Tuesday, Target on Wednesday and Wal-Mart on Thursday.
Stocks in the past week surged, with the Dow rallying 5 percent to a new high, its best gain in five years. The Dow ended Friday at 18.847, and the was up 3.8 percent at 2,164. The Nasdaq was up 3.7 percent, but the small-cap Russell 2000 outperformed with a more than 10 percent gain.
At the same time, U.S. Treasury yields zipped higher, particularly at the long end. The 10-year Treasury yield jumped to 2.15 percent, the highest level since January, from a pre-election level of 1.8 percent.
Literally overnight Tuesday into Wednesday, market sentiment shifted, and so did the stocks that were in favor. Financials ripped higher, up 11.3 percent for the week on the outlook for higher rates and less regulation. That was the best week for the sector since the bull market began in 2009.
Industrials bounced nearly 8 percent, and the Industrial Select SPDR Fund ETF had its best week in five years. Health care jumped 6 percent on Trump's vow to eliminate parts of Obamacare and on relief that Hillary Clinton did not win. She was outspoken on drug pricing and viewed as negative for drugs and biotech. The IBB iShares Nasdaq Biotechnology ETF jumped 14.4 percent in its best week ever.
"What you've also done here is you've priced in growth based on a resumption of animal spirits that may or may not occur. The point is what we do know this is a [president] who is likely to regulate less, not more. This is also an environment where interest rates have risen sharply enough that we could probably say with pretty high conviction that the lows in interest rates that you saw in July were very significant lows, the psychology around interest rates is turning," said Julian Emanuel, equity and derivatives strategy at UBS. Emanuel is keeping his year-end target for the S&P 500 just slightly higher than Friday's close at 2,175.
With the markets now pricing in higher interest rates, Fed officials take to the speaking circuit in the coming week and they are being watched to see if they endorse the idea of a December rate hike, as several have already. Fed Chair Janet Yellen testifies before Congress Thursday, Fed Vice Chair Stanley Fischer speaks Tuesday, New York Fed President William Dudley speaks Friday and there are more than a half dozen others appearing throughout the week.
"If the Fed doesn't raise rates in December, they're never going to raise them," said Jeff Gundlach, CEO of DoubleLine, in an appearance on CNBC. Gundlach also said he believes the run up in yields is about 80 percent over, but the move higher should also resume next year.
Strategists say the time is right for the Fed to move, given the positive reaction in markets to the changes coming in Washington.
"What's important for active managers, important in that their decisions have been governed and their difficulty in generating alpha in the last four or five years, has been very much a function of the psychological slog of ultra-accommodative monetary policy being the single most determinant of asset prices," said Emanuel. "The thought of that ending is really the thing that, for us, has caused a lot of sector rotation. There's been a ton of turn in the market. it's also changed the psychology. … The people we talk to are more engaged in trying to come up with alpha generating ideas more than in the entire period of the post financial crisis."
As U.S. yields rose, emerging markets were also stung by a sharp jump in rates. Their currencies were slammed, especially the Mexican , which was down more than 10 percent on the week.
Investors will be watching out for any comments from Trump on many topics, including trade. In an interview Friday with The Wall Street Journal, he said he would potentially impose tariffs on products of companies that relocate overseas.
Oil slumped in the past week, sliding 15 percent amid supply concerns. West Texas Intermediate futures were trading just above $43 late Friday. The S&P energy sector, however was up 2 percent even with the breakdown in crude futures.
"If it breaks $43, it will be a huge worry," said Art Cashin, director of floor operations at UBS. He said stocks could move higher but there will be bumps along the way, particularly if oil remains under pressure.
What to Watch
Earnings: Advance Auto Parts, Anglogold Ashanti
1:20 p.m. Dallas Fed President Rob Kaplan
4:30 p.m. Richmond Fed President Jeffrey Lacker on panel moderated by Rick Santelli
6:30 p.m. San Francisco Fed President John Williams
7:30 a.m. Boston Fed President Eric Rosengren
8:30 a.m. Retail sales
8:30 a.m. Import prices
8:30 a.m. Empire state survey
10:00 a.m. Business inventories
1:30 p.m. Fed Vice Chairman Stanley Fischer
7:45 a.m. Minneapolis Fed President Neel Kashkari
8:30 a.m. PPI
9:15 a.m. Industrial production
10:00 a.m. NAHB
4:00 p.m. TIC data
5:30 p.m. Philadelphia Fed President Patrick Harker
8:30 a.m. Initial claims
8:30 a.m. CPI
8:30 a.m. Housing starts
8:30 a.m. Philadelphia Fed survey
10 a.m. Fed Chair Janet Yellen testifies before the Joint Economic Committee of Congress on the economy
5:30 a.m. St. Louis Fed President James Bullard
9:30 a.m. New York Fed President William Dudley
9:30 a.m. Kansas City Fed President Esther George
1:30 p.m. Dallas Fed President Rob Kaplan
Updates: updated to include Testimony by Fed Chair Janet Yellen