- Stocks digest GDP revision. U.S. equities near flat in early trading after third-quarter gross domestic product (GDP) growth was revised upward on stronger-than-expected consumer spending. Yesterday’s session saw stocks pull back after a strong prior week; the S&P 500 lost 0.5%, weighed down by financials (-1.4%), while utilities (+2.0) staged a relief rally amid falling Treasury yields. Overnight in Asia, markets were mixed as Japan’s Nikkei finished with a 0.3% loss, while the Shanghai Composite edged up 0.2%. European indexes are mostly higher in afternoon trading, led upward by Italy’s MIB (+1.4%), though expectations regarding a “No” vote on Sunday’s referendum have not changed. Finally, Treasury yields are rising after yesterday’s drop, with the 10-year back to 2.34%, WTI crude crude oil ($45.15/barrel) is dropping more than 4% ahead of Wednesday’s Organization of Petroleum Exporting Countries (OPEC) meeting, and COMEX gold ($1,184/oz.) is down 0.5%.
- Treasury yields stall. Recent weeks have seen a surge in longer-dated Treasury yields (and a corresponding decrease in prices) as markets have worked to price in the potential of pro-business policies from the incoming Trump administration. However, the rise in yields stalled out last week, with the 10-year Treasury yield, which has increased by approximately 0.50% since its pre-election level, closing the week flat at 2.35%. The 30-year Treasury yield also lost steam, closing the week 0.03% lower at 3.01%. Volatility is likely to continue in the near term as Trump rolls out more details on his policy agenda before his January inauguration. We discuss the concept of interest rate risk within fixed income portfolios in this week’s Bond Market Perspectives, due out later today.
- Foreign yields move lower. Although the 10-year Treasury yield was flat on the week, German yields moved slightly lower, further increasing the yield advantage that Treasuries hold over their foreign counterparts. The 10-year Treasury currently holds a yield advantage of 2.12% versus the German bund, its highest level in more than 25 years. We believe Treasury yields may rise during 2017; however, foreign demand may help keep yields lower than they otherwise would be.
- Yield curve flattens on rise in short-term yields. Long-term yields jumped more than short-term yields post election, leading to a significant steepening of the yield curve. However, this reversed slightly last week, with the yield curve flattening as short-term yields continued to increase as markets continue to expect a rate hike at the Federal Reserve Bank’s (Fed) upcoming December meeting. The market is fully pricing in a Fed rate hike as measured by Fed fund futures.
- High-yield spreads tighten as equities and oil rally. High-yield bond spreads continued to tighten last week as markets priced in a more business-friendly environment. The asset class had also been bolstered by general discussion of an OPEC deal to cut production. Oil prices rose accordingly, but oil has reversed in the past couple of days as comments from several OPEC members have created doubts. Spreads, now back near their October lows, appear to once again be pricing in most of the good news, leaving less room for error and increased caution in the asset class.
- Municipal valuations improve. Municipal bond funds saw a $4.5 billion outflow during the week of 11/16 according to Investment Company Institute (ICI) data, the largest outflow since June of 2013. Taken in context, these outflows are not surprising, given that markets fled high-quality bonds in the week following Trump’s surprise win. Municipal bonds saw continued weakness last week, as the Barclays Municipal Bond Index lost 0.44%, underperforming Treasuries (which lost 0.16% based on the Barclays U.S. Aggregate Government – Treasury index), leading to a cheapening of valuations. 10- and 30-year municipal-to-Treasury ratios ended the week at 101% and 105%, respectively, their highest levels since October of 2015 and February of 2016, respectively.
- Q3 GDP revised higher, but market’s focus is on Q4 and 2017. Initially reported as a 2.9% gain in late October 2016, real GDP growth in Q3 2016 was revised higher to show a 3.2% increase. The consensus of economists polled by Bloomberg News thought that GDP would be revised to +3.0%, so the result was better than expected. The upward revision to consumer spending in Q3 (initially reported as a 2.1% increase; revised to show a 2.8% gain) accounted for all the upward revision. According to models run by economists at the Federal Reserve Banks of Atlanta and New York, Q4 GDP is tracking to between 2.5% and 3.5%. As noted in our Outlook 2017, we expect GDP in 2017 to come in at 2.5%.
- Finally a red day. Equities finally dropped, as the S&P 500 lost 0.5% for its largest drop since November 2. It has been 33 trading days since the last time the S&P 500 closed 1% lower, the third-longest streak this year. Also, the S&P 500 violated the intra-day lows from the previous day for the first time in 14 days. Small caps finally dropped as well, as the Russell 2000 (RUT) lost 1.3% for the first drop after 15 straight higher closes. That tied the 15-day win streak in February 1996, as the second-longest win streak ever for small caps.
- What does 19,000 really mean? A week ago today, the Dow closed above 19,000 for the first time in history, which brings the logical question: what does a close above a milestone level mean? Going back in history, the recent S&P 500 returns after clearing a 1,000 point milestone have led to some equity weakness, with the S&P 500 lower a month later after four of the previous five milestones (14,000 to 18,000). Looking at all the milestones shows a slightly weaker-than-average median return one and three months later, but longer term these milestone levels don’t appear to matter much. In the end, valuations, technicals, and fundamentals drive equity prices — not big round numbers. Today on the LPL Research blog we will take a closer look at this event.
- Cyber Monday was strong. Reuters is reporting that Cyber Monday U.S. sales may hit a record of $3.39 billion, calming some fears that strong online shopping data from Thanksgiving Day and Black Friday might have hurt Monday’s numbers. Sales are expected to be up 10.2% from 2015 levels, with some analysts suggesting pent-up demand due to the end of the election cycle. Please see last week’s Weekly Market Commentary, where we previewed holiday shopping.
- Personal Income and Spending (Oct)
- Chicago Area PMI (Nov)
- Beige Book
- Mester (Hawk)
- OPEC Meeting in Vienna
- China: Official Mfg. PMI (Nov)
- China: Official Non-Mfg. PMI (Nov)
- China: Caixin Mfg. PMI (Nov)
- ISM Mfg. (Nov)
- Vehicle Sales (Nov)
- Mester (Hawk)
- Employment Report (Nov)