AdvisorShares Weekly Market Review – Week Ending 12/30/2016

Highlights of the Prior Week

2016: The Good, The Bad & The Ugly

Macro

The Good of 2016 included domestic equities which gained 10%, the Bad included the passing of many social and popular culture icons who influenced us and whom we felt like we knew and the Ugly included the division created by the Presidential Election.

Some of the more sensational headlines were quite memorable including Brexit and nuclear testing in North Korea but also some headlines you may have forgotten (with a hat tip to Seeking Alpha) which included the Panama Papers, Italian bank woes, German auto problems and Pokemon Go.

The market also danced back and forth with whether or not the FOMC would hike rates, how many times it would hike and then finally the one hike of the year that for the second year in a row came at the group's final meeting of the year. Of course, the bond market did the FOMC's dirty work lifting rates in the marketplace ahead of the actual Fed announcement.

Despite a meh final week, down around 1%, domestic equities had a strong year and in the case of small caps, a very strong year. For 2016, the Dow Jones Industrial Average was up 13.48% on a price basis, the S&P 500 could not quite hold on to double digits with its 9.58% gain (it did get there with dividends however), the NASDAQ underperformed rising 7.54% and the Russell 2000 was the leader by far as it was up 19.19% in 2016. We would note that most of the Russell's outperformance came during the so-called Trump Rally as his win sent the US dollar higher which is viewed as being a positive for small cap companies which tend to be more domestically focused.

As mentioned the dollar was very strong in 2017, especially in the fourth quarter when it gained better than 7%. Underneath the surface there several interesting individual currency stories. The US dollar gained 15% against Malaysian ringgit. This is a good example of why currency exposure matters because the Kuala Lumpur Stock Index, the benchmark in Malaysia fell 3% in local terms for the year but the ETF tracking Malaysia available to US investors was down 20% for the year. There was a similar story with the UK which of course become the Nexus of the world in June because of the Brexit vote. The FTSE 100 had a very strong year in local terms rising better than 14% but the British pound fell almost 17% which translated into a 5% decline for the US listed ETF tracking the British market.

Global sovereign yields went on a wild ride of their own in 2016 including a panic lower in the wake of the Brexit vote followed by a substantial move higher after the Trump win on expectations/hope that Trump will be more pro-growth than his predecessor and that he will actually be effective in getting his platform through congress. The Ten-Year US Treasury Note started the year at 2.26%, got as low as 1.35% and closed the year at 2.44% but not before getting above 2.60% in December. The German bund began 2016 at 0.63% then spent much of the summer in negative territory possibly due to Brexit-related uncertainty before going back into positive territory to finish at 0.20% by way of 0.39% in mid-December. The French OAT followed a similar path but closed the year lower than it started at 0.68%. While several ten year notes around the world spent time in negative territory, they all went positive by year end except for the Swiss ten year which has been negative for two years, closing 2016 at -0.18%, since the Swiss National Bank unpegged the franc from the euro.

Perhaps the wildest ride of all was the one endured by West Texas Intermediate Crude. Continuing the crash that started in 2015, crude spend the first quarter in the $20's-$30's before making its way, in fits and starts, back above $50. We will refrain from attempting to predict what crude oil might do but in terms of sustainable pricing, we saw a low last year that was not sustainable for production just as we saw a high in 2008 that was not sustainable for production. Should the agreed upon OPEC/non-OPEC cuts be maintained that would create at least a modest tailwind for a sustainable price level.

Gold as measured in US dollars had an interesting year. As equities struggled out of the starting blocks gold was strong on its way to a 25% gain by the Brexit vote. In the back half of the year, especially after the US elections, it sold off as equities rallied but still finished the year with about an 8% gain. Industrial commodities got a lift, especially late in the year as talk of renewed infrastructure spending created interest in the group including 60% rise in the price of zinc according to Barron's.

Interesting Reads

Although sports related we found interesting OTL Investigates The Implosion Of Daily Sports Fantasy Leaders DraftKings & FanDuel;

Daily fantasy's meteoric rise -- breathtaking for its breakneck speed, avalanche of investors' cash and ever-spiraling valuations -- spurred the two companies' endlessly annoying, record-shattering arms race for new customers and industry dominance. In only three years, DraftKings zoomed from an idea hatched by three buddies in a Boston barroom into a nearly $2 billion company, replete with comparisons to overnight Silicon Valley unicorns like Uber and Snapchat. FanDuel was right there too. The two companies processed a combined $3 billion in player-entry fees in 2015.

Sports

How about a great sports story from the NHL to start the New Year? ESPN tells us that Carolina Hurricanes Equipment Manager Jorge Alves Plays Final 7.6 Seconds In Net;

The Hurricanes had Alves lead the team onto the ice for warmups, letting him skate around the Carolina zone in his No. 40 jersey by himself before joining him. "I think it was a special night -- it's a night he'll never forget," Carolina coach Bill Peters said. "A perfect storm of opportunity for him. It couldn't happen to a better guy."

Source: Google Finance, Yahoo Finance, Wall Street Journal, SeekingAlpha, Bloomberg, Reuters, Barrons, ETF.com, XTF.com, Bespoke Investment Group, ESPN

S&P Sector Analysis

As for the sectors of the S&P 500, five outperformed the broad benchmark - Real Estate, Utilities, Telecom, Staples, and Healthcare. The remaining six - Materials, Industrials, Energy, Discretionary, Financials, and Technology - each underperformed. The dispersion between the top-performing and bottom-performing sectors was roughly 2.78% for the week ending 12/30/16, with Telecom outperforming all, and Discretionary coming in last.

For December 26th, 2016 to December 30th, 2016

As measured by the S&P 500 sector indices, respective performances were: