Dow Jones Industrial Average Set for Best Year Since 2013
December 30 2016 - 1:26PM
Dow Jones News
By Aaron Kuriloff
The Dow Jones Industrial Average shook off its worst-ever start
to a year and is now on track for its best performance since 2013,
as investors bank on an improving economy.
The index of 30 blue-chip stocks is up around 14% in 2016 even
as it edged lower Friday, falling 0.2% to 19783 on the final
trading day of the year. The S&P 500 is up 9.7% this year, and
the Nasdaq Composite is up 7.6%.
The bulk of 2016's gains came in the second half of the year. A
rebound in corporate earnings, accelerating U.S. economic growth
and stabilizing oil prices helped stoke investor enthusiasm for
stocks. The rally gathered pace after the U.S. election of Donald
Trump as president on Nov. 8, as investors bet the new
administration would usher in business-friendly policies like tax
cuts, looser regulation and fiscal stimulus. The Dow industrials
closed above 19000 for the first time ever on Nov. 22 and have
gained roughly 8% since Election Day, setting several new closing
highs.
However, a stall in the recent rally has raised questions about
whether stocks will continue to surge into 2017 and propel the Dow
Jones Industrial Average to 20000, its next thousand-point
milestone. The Dow industrials were on track Friday for their first
weekly loss since the election. Mr. Trump's policies could fall
short of expectations, and the rally has made stocks expensive by
historical measures.
"Now comes the hard part," said Lew Piantedosi, portfolio
manager at Eaton Vance. "What are these policies actually going to
look like? That's where the true uncertainty lies."
Still, stocks are finishing 2016 better than they began. The Dow
industrials delivered its worst-ever five-day start to a year,
falling 6.2%. A slide in China's stock market and the weakening
yuan sparked selling around the globe, as investors grew concerned
about the effects of a slowdown in the world's second-largest
economy, including a possible U.S. recession. The Dow bottomed at
15660.18 on Feb. 11, a two-year low, having fallen more than 10%
from the end of 2015. U.S. crude-oil futures also hit their 2016
trough that day, settling at $26.21 a barrel on the New York
Mercantile Exchange, their lowest level since 2003.
Oil is now on pace for its biggest annual gain since the
financial crisis, propelled by a deal among the Organization of the
Petroleum Exporting Countries and other major oil producers to cut
output after a global glut had pressured the market for two years.
U.S. crude is now at $53.70 a barrel, putting it up around 45% in
2016, which would be its best year since 2009. Energy is the
best-performing sector out of 11 in the S&P 500 this year,
rising 24%.
Fears about the U.S. economy have also abated.
U.S. gross domestic product, the broadest measure of economic
output, advanced at a 3.5% inflation- and seasonally adjusted
annual rate in the third quarter, according to the Commerce
Department. It was the strongest reading in two years and followed
three straight quarters of sub-2% growth. The unemployment rate has
fallen to 4.6%, and U.S. corporate earnings are growing after
several quarters of declines.
The Federal Reserve held off on raising interest rates for most
of the year before moving in December for the first time since the
end of 2015. Officials also signaled more increases are on the way,
reflecting optimism about the U.S. economy.
Expectations for higher interest rates have helped put U.S.
government bonds on track for a second consecutive year of price
declines. The yield on the benchmark 10-year Treasury note, which
moves opposite price, is at 2.461%, according to Tradeweb, up from
2.273% at the end of 2015. It's a marked turnaround from earlier
this year, when yields tumbled as investors piled into the bond
market on the possibility of a prolonged period of sluggish
economic growth, low inflation and ultraloose monetary policy. The
10-year yield fell to 1.366% on July 8, its lowest level on record,
after the U.K. voted to leave the European Union.
Brighter economic prospects have boosted the dollar late in the
year. The WSJ Dollar Index, which measures the dollar against a
basket of 16 other currencies, is up around 3% in 2016. However, a
strengthening U.S. currency could threaten the nascent recovery in
U.S. corporate earnings by making U.S. exports more expensive to
foreign buyers and reducing the value of companies' overseas
revenues.
In addition, some investors are skeptical that corporate
earnings will grow enough to support stock valuations, which are
higher than their historical average. Shares of companies in the
S&P 500 traded at an average of roughly 21 times their past 12
months of earnings Thursday, above their 10-year average of 16,
according to FactSet.
While investors grew more hopeful for further gains toward the
end of the year, several said the rally would stand on firmer
ground with additional support from policy and the economy.
"I posit that a lot of assumptions that have been made over the
past few months are pure speculation and we have no idea what's
going to happen," said Jim Tierney, chief investment officer of
concentrated U.S. growth at AllianceBernstein Holding LP. "The
first few months of 2017 are going to be more important, as we read
the tea leaves, than the past few months."
--Akane Otani contributed to this article.
Write to Aaron Kuriloff at aaron.kuriloff@wsj.com
(END) Dow Jones Newswires
December 30, 2016 14:11 ET (19:11 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.