By Pete Biebel, Vice President

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The first surprise was not just that Mr. Trump won the election, but also that the election resulted in an across-the-board Republican victory. The second surprise was that, instead of plunging on Mr. Trump’s election, the market actually rallied; in fact, it rallied a lot. Then, in what may be the biggest surprise, the rally continued; in fact, it continued a lot. Sur-prise! Sur-prise! Sur-prise!

In the prior week, the pace of the market’s advance slackened substantially, but the steeper rate of climb resumed last week. The rally seems to have gotten to the stage where it’s feeding on itself. We have not yet had any policy or legislative developments that have added to the bullishness of the election results, but the market action itself has inveigled holders of sideline cash to jump onboard; and they seem to be jumping into the groups that have been leading the rally. The strong groups keep getting stronger and the weak groups continue to languish.

Small-cap stocks and the Financial sector have been the clear winners. The Russell 2000 Index of small-cap stocks has rallied more than 16% since Election Day. The S&P Financial Sector has gained nearly 19% over that time. Care to take a guess how small-cap banks have done? The NASDAQ ABA Community Bank Index has appreciated more than 30% over the past five weeks. Shazam!

The Energy sector has the second-best post-election performance of the eleven S&P industry sectors, though its 10.4% gain is just a little more than half of the gain in Financials. Energy had the largest sector gain in the prior week (+3.2%) and percolated up another 2.2% last week. Higher crude oil prices have helped to pump up the performance of energy companies. Crude ended the week at $51.50, near its high of the year. Much of the recent rally has come on speculation that OPEC would come to an agreement to reduce production. News on Sunday that other oil producing countries have agreed with OPEC to cut output led to a spike in crude to above $54 a barrel in overnight trading.

Meanwhile, both the Consumer Staples and the Utilities sectors ended last week 1.5-2.5% below their Election Day levels. A couple other sectors, Healthcare and Real Estate, have gained less than 1% since the election.

Two developments in particular contributed to the steepening of the rally’s trajectory last week. One was the rebound of stocks in the Technology sector. That sector decline nearly 3% in the prior week and was a big reason that the NASDAQ Composite Index (COMP) fell more than 2% that week while the Dow Jones Industrial Average (DJIA) was able to eke out a small net gain. The Technology sector re-booted and gained more than 4% last week.

A second development was the continuing drive higher in the Dow Jones Transportation Average. That group has gained more than 17% since November 1. While that index had been trucking steadily higher, it flew to a new high (finally exceeding its November 2014 peak) on Wednesday. That new high confirmed a Dow Theory buy signal, providing another reason for buyers to climb aboard the rally. The broad averages enjoyed their largest gains of the week that afternoon, building momentum that carried into the weekend.

All of the major averages gained a little over 3% for the week. Most indices are already overbought and overdue for a short-term timeout. DJIA ended the week near 19,757, just one good day below the 20,000 level. With the seasonal bullish bias, we should probably expect the Dow to make a run at that level sometime before yearend.

For what it’s worth, one of the leading sectors through the first three-quarters of the year was the Brazilian stock market. Indices of that market had year-to-date gains of more than 80% in U.S. Dollar terms into late-October (How do you say, “Gawww-leeee!” in Portuguese?). When the Dollar spiked in value in the weeks following the election, Brazil headed south. The value of their currency, the Real, declined about 10% against the Dollar over the past month. In Dollar terms, the value of the Brazilian market averages lost more than 16% in the month of November.

Just two shopping days remain before Fed Day. Wednesday will bring not only a bevy of economic reports, but also the long awaited, highly anticipated and probably over-rated policy announcement from the Fed. The market expects that the Committee will announce a 25 basis point increase in its target short-term interest rate. The potentially more significant news could come in the language in the Committee’s statement and in the post-meeting press conference. The market will be trying to gauge the degree to which the Committee is anticipating the economic impacts of the new administration’s presumed policies as opposed to waiting for those impacts to show up in the data.

Economic Report Calendar Prior Reading Consensus
Tuesday 12/13/2016 Import and Export Prices, Imports +0.5% -0.4%
Import and Export Prices, Exports +0.2%  0.0%
Wednesday 12/14/2016 Producer Price Index-Final Demand, M/M 0.0%  +0.2%
Producer Price Index-Final Demand, less Food & Energy, M/M -0.2% +0.2%
Retail Sales, M/M +0.8%  +0.4%
Retail Sales, less Autos, M/M +0.8%  +0.3%
Industrial Production, Production, M/M 0.0%  -0.2%
Industrial Production, Manufacturing, M/M +0.2%  -0.1%
FOMC Meeting Announcement, Forecasts and Press Conference
Thursday 12/15/2016 Jobless Claims 258K 255K
Consumer Price Index, M/M +0.4% +0.2%
Consumer Price Index, less Food & Energy, M/M +0.1% +0.2%
Philadelphia Fed Business Outlook Survey 7.6 10.0
Empire State Manufacturing Survey 1.5 3.0
Friday 12/16/2016 Housing Starts 1.323mm 1.230mm