- Stock rally poised to continue after indexes post fresh highs. Domestic equities are again moving higher this morning after all three major U.S. indexes closed at record highs yesterday; the S&P 500 notched a 0.8% gain, led by energy stocks (+2.2%) on the heels of a 4.1% rally in crude; the technology, materials, and utilities sectors also rose more than 1%. Overseas markets are enjoying broad strength, helped in part by rising metals prices and dollar weakness. The Hang Seng (+1.4%) led in Asia overnight, though China’s Shanghai Composite rose 0.9%, Japan’s Nikkei overcame initial weakness following yesterday’s earthquake to finish up 0.3%. The rally in metals is also buoying stocks in Europe, paced by the UK’s FTSE 100 (+0.8%). Elsewhere, WTI crude oil (+0.5%) is adding to gains, COMEX gold (+0.1%) is near flat, and the yield curve is flattening as short-term Treasury prices are falling while the yield on the 10-year note is steady near 2.32%.
- Treasury yields near late 2015 levels. Looking back to this time last year may give a sense of déjà vu for bond investors. Following discussions throughout the year, markets were fixated on the possibility of a Federal Reserve Bank (Fed) rate hike at the Federal Open Market Committee’s (FOMC) December meeting, and intermediate- and long-term Treasuries were trading in a very similar range compared with today. While many aspects of the market are the same, economic growth and inflation expectations may be the biggest difference makers in the year to come. We explore this theme in more detail in this week’s Bond Market Perspectives, due out later today.
- But some things are different. One thing that is different this time is that the Treasury yield advantage to German bunds is near a 25-year high. Continued weak economic growth overseas will likely continue putting downward pressure on U.S. yields this year, keeping them lower than they would otherwise be. Implied inflation expectations, as measured by the difference between the 10-year Treasury and TIPS yields are also higher this year than last, reflecting more optimism for additional fiscal spending and stronger economic growth.
- High-yield and emerging market debt spreads compress. High-yield spreads continued to compress last week, as markets priced in more business-friendly policies and an improved economic outlook. Oil’s recent gains have also helped the sector, but have had an even bigger impact on emerging market debt, which saw spreads contract on oil strength following a significant widening the week before as markets priced in the impact of a Trump presidency on emerging markets.
- Another difficult week for municipals. Municipal bonds underperformed U.S. Treasuries on the week by 0.22% in 10-year notes, and 0.26% in 30-year bonds (as measured by the Municipal MMD AAA scale and the on the run U.S. Treasury yield spots from November 14- November 21). The dramatic selloff since the election has been fueled by concerns that the president-elect will add supply pressure to the market with his aggressive infrastructure spending plan. In addition, investors are concerned that his tax-cutting agenda will diminish the tax-exempt benefit of the asset class, which may negatively impact demand. This, coupled with the Federal Reserve meeting in December to consider raising interest rates, has many investors shedding lower-rated risk and longer duration. On the week, investors withdrew $3 billion out of muni funds of which $1.59 billion came out of high yield, according to Lipper data.
- Latest Weekly Economic Commentary. This week’s Weekly Economic Commentary focuses on the state of the U.S. economy today versus the other transition periods between presidential administrations, dating back to the early 1960s. We find that the economy today is middle of the pack versus when the previous 10 presidents took office. The data suggest that the economy isn’t in dire need of fiscal stimulus like it was when Kennedy, Reagan, or Obama took over, providing time to get the mix and scope of stimulus “just right” for current conditions.
- Conspicuous absence. In a video statement on YouTube yesterday, Trump provided a high-level outline of his plans for the first 100 days. His comments on renegotiating trade deals, deregulation, and reducing lobbyists influence in Washington were not surprising. Conspicuously absent from the video: healthcare. We continue to believe an overhaul of the Affordable Care Act is a top priority for the incoming administration, but the absence of this topic in last night’s comments, Trump’s recent comments about keeping parts of the law, and the amount of time an overhaul will take all point to perhaps a longer period of stability and smoother transition to the next phase for the healthcare sector than many think. Our sector view remains positive.
- The S&P 500 finally makes new highs. The S&P 500 closed at a new all-time high yesterday for the first time since August 15, 2016. Small caps meanwhile continued to sizzle, as the Russell 2000 is up 12 days in a row for the longest winning streak since 12 in a row in 2003. It hasn’t been up 13 in a row for more than 20 years. Incredibly, the Russell 2000 has made a new all-time high for six straight days, the longest stretch since seven in a row in 2013. Last, to show how strong things have been, the S&P 500 hasn’t traded beneath the previous day’s low for 11 consecutive days — the longest such streak in two years.
- The four major indexes made new highs yesterday. Yesterday, the S&P 500 wasn’t the only index that made new all-time highs, as the Dow, Nasdaq, and Russell 2000 all closed at all-time highs as well. The last time this happened was December 31, 1999. Many will hear that date and remember that was near the end of an 18-year bull run. What you might not realize is this actually happened a grand total of 47 times during the 1990s, with the first instance occurring on December 31, 1991, when the S&P 500 closed at 417.28. In other words, it went on to gain approximately 252% from the first signal in 1991 to that fateful signal in late 1999.
- OPEC Meeting in Vienna
- Durable Goods Orders and Shipments (Oct)
- Markit Mfg. PMI (Nov)
- FOMC Minutes
- Eurozone: Markit Mfg. PMI (Nov)
- Japan: Nikkei Mfg. PMI (Nov)
- Germany: Ifo
- Advance Report on Goods Trade Balance (Oct)