While it has been a relatively quiet US economic calendar to kick off the New Year, the data we did get was better than expected.  The most notable of them all was the ISM Manufacturing report for the month of December.  Economists were expecting a headline reading of 53.8, but the actual reading came in notably higher at 54.7, which was the highest level in exactly two years.

Not only was the headline reading strong, but the internals were also mostly to the upside.  On a month/month basis, just two components declined, while on a year/year basis only one component declined.  The biggest gainers this month were Prices Paid, New Orders, and Production.  In the case of Prices Paid, that index rose 11 points to 65.5, which was the highest monthly reading since June 2011 (chart below).  While the 11-point increase was large, we saw an even larger one-month increase back in March when the Prices Paid component surged 13 points.

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Bespoke co-founder Paul Hickey appeared on CNBC’s Fast Money Halftime to discuss markets and our outlook for 2017.  To view the segment, please click on the image below.

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2016 may have gone out like a bear, but 2017 is kicking off bullish.  US equities are beginning the year in the green, looking to end what was a three-day losing streak for the S&P 500, DJIA, and Nasdaq to close out 2016; the first such streak since the start of November.  So just when you thought they couldn’t go down anymore, the last three days of 2016 served as a reminder that equity performance is in fact a two-way street.  But today, the direction is back up as the S&P 500 is set for its first positive day to start a year since 2013.

Looking at sector returns during the last three days of the year, it looked like nothing more than profit-taking as the market’s leading sector (Financials) during the rally was among the laggards, while the three sectors that held up the best were among the biggest laggards during the rally.  One sector that stands out is Telecom Services; while it was the second best performing sector during the rally, it was the third best performing sector in the last three trading days of 2016.  With just five stocks in the sector, though, we have probably already wasted more than enough ink talking about it.

One significant sector worth talking about, though, is Technology.  With a gain of 3.5% post-election, through 12/27, the sector fell close to 2% in the last three days of the year, erasing more than half of its post-election gains. Since the close on 11/8, the only three sectors that have done worse are Consumer Staples (-1.2%), Utilities (-0.27%), and Health Care (1.2%).

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Happy New Years and welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week.  The links are mostly market related, but there are some other interesting subjects covered as well.  We hope you enjoy the food for thought as a supplement to the research we provide you during the week.

Hedge Funds

Hedge Fund Math: Heads We Win, Tails You Lose by James B. Stewart (NYT)

A look inside the math of big revenues despite underperformance for hedge funds. [Link; soft paywall]

Trump’s Treasury Pick Moves in Secretive Hedge Fund Circles by Matthew Goldstein and Alexandra Steveson (NYT)

We’re confused: is being a Goldman Sachs alum a plutocratic non-starter for a cabinet position, or is the right angle “Mnuchin wasn’t that famous as a Goldman Sachs guy, and probably not even as a hedge fund guy, so why is he there?” We’ll let you make the call. [Link; soft paywall]

Amazon

Amazon wins patent for a flying warehouse that will deploy drones to deliver parcels in minutes by Arjun Kharpal (CNBC)

Who knows whether this new patent will come to anything – the US Patent Office literally floats on a sea of ideas that never came to fruition – but the idea of flying warehouses is certainly attention-grabbing! [Link; auto-playing video]

Want an Amazon Echo for Christmas? Sorry, it’s sold out by Stan Schroeder (Mashable)

Both the Echo and its smaller Echo Dot sister device were in high demand this holiday season, as the speakers become one of the more successful hardware efforts the company has come up with. [Link]

Fun With Hardware

From Tape Drives to Memory Orbs, the Data Formats of Star Wars Suck (Spoilers) by Sarah Jeong (Motherboard)

A hilarious look at the plethora of storage devices used to move around plans for the Death Star. [Link]

Real Estate

House Flipping Makes a Comeback as Home Prices Rise by Kirsten Grind and Peter Rudegeair (WSJ)

While it hasn’t come close to the heights reached in the mid-2000s, rising home prices and demand for housing stock has made the buy, renovate, and move on popular – and profitable – again. [Link; paywall]

A Storm Brewing on the Apartment Horizon by Mark Hickey (CoStar Group)

While single family home demand is doing great things (see the story above!), apartments are starting to enter a period of structural low demand driven by demographics. [Link]

Economic Musings

Why historians would make bad policy advisers by Neville Morley (Aeon)

While history can often be a guide to current events – and has a funny habit of repeating – Dresser argues that the human element is far more important than the abstract “laws” of history. [Link]

The emptiness of life will save us from mass unemployment (Pseudoerasmus)

A succinct and digestible argument that despite fears of machine-driven mass unemployment, there will always be demand for human labor. [Link]

The “Lucky 13” States and the Challenges of Geographically Concentrated Growth by Adam Carstens (Medium)

Summarizing the combination of geography and demographics that are currently bestowing growth on a relatively small portion of US with major tailwinds, Carstens also offers some possible solutions for the headwinds facing the rest of the country. [Link]

Long Reads

Our Favorite Wired Longreads of the Year by Charley Locke (Wired)

VR, AI, streaming, memory, robot velociraptors, ISIS social media strategy, old observatories, lead water, teens on the internet, the end of movies, terrible first seasons, pun competitions, the President on tech, graphic design, and the Dallas Police Department: 15 long reads for the year that was. [Link]

The Manhattan Cocktail: A Complete Guide to Its Myths and Mixology by Troy Patterson (Bloomberg)

A long meandering stroll down the road of whiskey, vermouth, and bitters that combine into what is still, in our opinion, a very underrated cocktail. [Link]

A Bigger Problem Than ISIS? by Dexter Filkins (The New Yorker)

When you start using billions of cubic meters and millions of acre-feet to describe volumes of water, you know you’re operating on a pretty ridiculous scale. That’s the sort of threat that’s sitting behind an aging bank of concrete in northern Iraq. [Link]

Business In America

Big Growth in Tiny Businesses by Jeffrey Sparshott (WSJ)

The ranks of manufacturers with no employees have swollen by 17% over the last decade, driven by surging demand for “craft” and “quaint” products that command a premium. [Link; paywall]

Democracy

The Toughest Death of 2016: the Democratic Norms That (Used to) Guide Our Political System by Seth Masket (Pacific Standard)

In the long run, the only real problem with 2016 might have been the damage done to norms that have served our republic well for the past two centuries. [Link]

Yesterday we posted a bearish chart from our 2017 Bespoke Report market outlook.  Lest we end the year on an overly negative note, we thought we’d also post a more positive spin on things.  We like to think our outlook paints a full picture, taking into account both the positives and negatives facing investors.  In 178 pages of charts, analysis and commentary there is obviously no shortage of important data points, some of which paint a positive, while others a negative picture.  Below we’re including one of the more bullish tables from the outlook report.  In the table below we show market returns following long periods in a bull market where the S&P fails to make a new bull market high.  As can be seen, long consolidation phases without a new high, tend to be followed by positive returns over the following 3, 6 and 12 months. Since we exited a 416 day consolidation phase in July 2016, this certainly qualifies as a positive indicator heading into 2017.

To view the full 2017 Bespoke Report, simply sign up for a 30-day free trial to Bespoke Premium.  It’s that easy!