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Weekly Market Update – December 9, 2016

The Dow was up 142 points on Friday. It finished the week up 512 points at 19,756. Performance continued to vary considerably by sector. Financials saw continued gains, as investors wagered that a Republican agenda of deregulation, infrastructure stimulus spending, and corporate tax reform would give banks’ earnings a boost. Biotech and pharmaceuticals, on the other hand, struggled this week after the president-elect vowed to bring down costly drug prices. The US Preferred Index is down 3.14% since the election. Our preferred continue to outperform this index and the Barclay’s Aggregate Bond Index, although all fixed income is down since the election.

The week also brought significant political developments In Europe. The reaction to Italy’s rejection of a referendum on proposed constitutional changes was muted. Markets had largely priced in a “no” vote. The measure’s failure prompted the resignation of centrist Prime Minister Matteo Renzi, necessitating the formation of a new national government. The subsequent political uncertainty has jeopardized plans to recapitalize Italy’s seriously troubled banking industry. Those concerns grew more urgent Friday following the ECB’s rejection of a plan for private-sector recapitalization – leaving a government bailout as the only viable solution. Additionally, the ECB announced Thursday that it would extend its inflationary quantitative easing program for nine months in light of still-sluggish growth in the Eurozone.

It was a quiet week on the domestic economic front. The ISM manufacturing index hit 57.2, well ahead of the expected 55.5 reading, driven by stronger employment. Jobless claims dropped to 258,000, down 10,000 from the previous week and below the 260,000 consensus. New jobless claims have been below 300,000 since March of 2015 – the longest such period since 1970 – and, taken with the steady stream of positive payroll data, suggest that the labor market is approaching full employment. Crude oil was flat on the week, closing at $51.41 Friday afternoon. Markets are awaiting the outcome of a meeting tomorrow between OPEC and non-OPEC producers concerning a proposed production cut agreement.

Likewise, the Federal Reserve offered little additional guidance to investors. St. Louis Fed President Bullard, though cautiously optimistic that Trump’s proposed stimulus could boost the economy, reiterated the need for a careful approach to rate hikes in the face of sluggish growth. William Dudley, president of the New York Fed, said that despite market optimism future fiscal policy remains uncertain.

Highlights from next week’s economic calendar include retail sales (Dec. 14), the consumer price index (Dec. 15), initial jobless claims (Dec. 15), and housing starts (Dec. 16). On Wednesday, all eyes will be on the December meeting of Federal Reserve’s Open Market Committee. The Fed is expected to raise rates a quarter of a percent.

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