Wall Street is busy in week ahead but it's the Trump trade that may matter most
Investors will get a good look under the hood of the economy in the coming week, but what may matter most is what can be learned about the programs Donald Trump plans to push through when he gets to Washington.
The promise of a giant fiscal stimulus program, tax cuts and regulatory rollbacks have buoyed stocks to record highs and driven bond yields higher. Stocks broke into record territory and were up more than 1 percent in the past week, with some groups like small caps and transports up more than 2 percent.
According to CFRA, the back-to-back all-time highs in both the and S&P Small Cap 600, bode well for further gains. Since 1979, the S&P has gained an average 1.7 percent three months after such an occurrence, 4.1 percent six months later and 8.8 percent a year after such a move.
CFRA also said that only twice since 1949 has the S&P 500 performed better than this year's 3 percent gain in the 10-days after a presidential election. The previous times were when Ronald Reagan and Dwight Eisenhower were elected.
"We're near-term overbought. There could be some consolidation, but we're breaking higher and we're breaking higher with the right leadership and in the right way," said Ari Wald, technical analyst at Oppenheimer.
There's a burst of data in the week ahead, including the jobs report on Friday — expected to show 175,000 nonfarm payrolls were added in November, and the unemployment rate at 4.9 percent, according to Thomson Reuters.
There's a slew of other reports that will show what the economy was doing both before and after the election, including an update to third-quarter GDP on Tuesday, expected at 3 percent. November auto sales are scheduled to be released Thursday as is ISM manufacturing data.
There will also be early readings on how the holiday shopping season is going, with promising anecdotes. There are a number of retailers reporting earnings, and they could give more color on how the early holiday shopping season is shaping up. Tiffany is scheduled to report Tuesday, and Ulta and Dollar General are set to announce Thursday. The S&P consumer discretionary sector, which includes retail, ended the week at an all-time high.
The rush of economic data will be weighed against the market's expectations that the Fed is on track to raise interest rates Dec. 14 by a quarter point. Economists expect the central bank to move ahead.
"I wonder if the sleeper number is the unemployment rate," said Chris Rupkey, chief financial economist at MUFG Union Bank. "The jobless claims are suggesting the labor market is going to get a second wind." Rupkey expects a bounce back in hiring after a few slow months, and job growth of 250,000 payrolls.
Data has been mixed with some better-than-expected readings, but not so in Friday's trade data, which led some economists to pare back GDP expectations for the fourth quarter.
Oil prices may also be a factor in the week ahead. OPEC meets Wednesday and it will decide whether to curb output, along with other non-OPEC producers. Analysts mostly expect some sort of deal, and that decision — either way — could help drive crude prices for months to come.
"I think there's a 70 percent chance they'll get an agreement. That's how I rate it," said Dan Yergin, IHS Markit vice chairman.
"If it breaks down, it will be much more over Iran than Iraq. All of them are feeling the revenue pressures. The market is rebalancing, but it's taking longer than expected," he said. Oil was down in the past week and slid Friday on reports from sources that Saudi Arabia was not attending a meeting with Russia because OPEC members have not agreed among themselves.
Russia has said it would not join cuts but it could freeze at current levels.
"I am still of the view there will be a face-saving measure. They'll put together a cut that officializes what they were going to do anyway," said Michael Cohen, head of energy commodities research at Barclays. If there is no deal, analysts expect oil prices to fall sharply.
The action in the bond market and dollar will also continue to be important. The 10-year Treasury touched a high of 2.41 percent early Friday and it was at 2.35 percent later in the day. Profit-taking hit the dollar Friday but it was slightly higher on the week.
The Dow ended the week with a gain of 1.5 percent, at 19,152, finishing at an all-time high. The was up 1.4 percent for the week at 2,213, and the Nasdaq was up 1.5 percent at a record 5,398. The small-cap Russell 2000 ended the week up 2.4 percent at 1,347, and finished Friday with its 15th straight gain.
"You've seen some very big moves in stock prices, down in utilities and a large move up in financials and industrials. The overall market has been able to make progress but the sector rotation has been tremendous. We're in the seasonally strongest time of year now. There had been a lot of apprehension about the election. Now there's going to be performance chasing," said Steven Wieting, global chief strategist at Citi Private Bank.
"I think that is not something that continues for too long. If you look at what's happened on rates and interest rate volatility, you can't keep going up 50 basis points on rates just on expectations and not expect it to affect other asset classes."
Wieting said he has therefore become a bit more cautious on the market. "I think the optimism about the U.S. at least from a fiscal policy standpoint makes some sense," he said, but noted there are more concerns about Europe.
"We took international equities down and kept U.S. at neutral rating and decreased duration in bond portfolios and kept underweight in fixed income and raised cash," said Wieting. "Mostly where we cut was European equities away from the U.K. and stocks in Southeast Asia."
The Italian constitutional referendum is scheduled for Dec. 4 so markets may focus on Europe ahead of that vote, though at this point it is not expected to have immediate major market impact even if the vote is no, as expected. In that case, Prime Minister Matteo Renzi has vowed to resign if reforms are rejected and there would be a general election.
But it's the combination of that and other European elections that could cause worry if candidates favor a move away from the euro.
"Europe I would say, from next month throughout the coming year, the political calendar is really agonizing. ... On Dec. 4, you're not only going to have the Italian referendum but an Austrian election. Political cohesion in the euro zone is more important than it is in the U.S. and U.K. which have their own currencies. When you think about the French election, the Dutch election, German elections next year, we just wanted to take a step back" Wieting said.
Markets have been watching Donald Trump's Cabinet choices with much more interest than usual because there is more uncertainty around what type of policies he will ultimately pursue. He is a different sort of president-elect, as a Washington outsider. The businessman made promises that analysts see as big growth catalysts, like the tax cuts and spending plans, but they also see some of his campaign talk on trade as protectionist.
"If he shuts the borders because the anti-trade Trump comes out, we'll have a recession and the market will go down. If that side stays quiet, and he cuts taxes, it could be up a lot ... I don't know what Trump we elected," said Bob Doll, chief U.S. equity strategist at Nuveen Asset Management.
"It's always a weird time when you change administrations from one party to the other. it's also weird because of who we elected — a nonpolitician who was all over the place during the campaign so uncertainty is still there," he said.
Doll said he expects the "growth" Trump to prevail, but that's still not clear. Under the new president, he said stocks should do better than bonds and he expects the market to end the year higher.
"With seasonality, more likely it's going to be higher than where we are. I hesitate because we've run so hard for the last couple of weeks. Maybe we take a breath and then we come on with a year-end rally. I don't know. But I can't believe it would (go) straight up to the end of the year," he said.
There is also Chinese data, with industrial production Sunday and PMI on Thursday.
What to Watch
Monday
Earnings: Shoe Carnival, ZTO Express, Thor Industries
Tuesday
Earnings: Tiffany, Splunk, Autodesk, Malinckrodt, Bank of Nova Scotia, Nutanix
8:30 a.m. Real GDP Q3 second
9:00 a.m. S&P/Case Shiller home prices
9:15 a.m. New York Fed President William Dudley
10:00 a.m. Consumer confidence
Wednesday
Earnings: American Eagle Outfitters, La-Z-Boy, Box, Synopsys, Royal Bank of Canada, Guess, Pure Storage, Semtech, PVH
8:00 a.m. Dallas Fed President Rob Kaplan
8:15 a.m. ADP employment
8:30 a.m. Personal income
9:45 a.m. Chicago PMI
10:00 a.m. Pending home sales
12:35 p.m. Cleveland Fed President Loretta Mester
2:00 p.m. Beige book
Thursday
Monthly vehicle sales
Earnings: Toronto-Dominion Bank, Dollar General, Ulta Salon, Lands' End, Kroger, Express, Canadian Imperial Bank, Ambarella, Workday, Smith & Wesson, Five Below, Ascena Retail
8:30 a.m. Initial claims
8:30 a.m. Cleveland Fed's Mester
9:00 a.m. Dallas Fed's Kaplan
9:45 a.m. Manufacturing PMI
10:00 a.m. ISM manufacturing
10:00 a.m. Construction spending
Friday
Earnings: Big Lots
8:30 a.m. Employment report
12:30 p.m. Fed Gov. Daniel Tarullo
12:30 p.m. Cleveland Fed's Mester