Market Update: Tuesday, December 13, 2016


  • Equities follow overseas markets higher. (10:27am ET) Domestic indexes are up this morning following gains across the globe. This comes after the S&P 500 closed lower on Monday, snapping a six-day win streak. Paring early gains alongside WTI crude oil (+2.6%), the energy sector (+0.7%) eventually finished behind both telecom (+1.1%) and utilities (+1.0%). Financials (-0.9%) underperformed after a strong run over the last several weeks. Overseas, both the Shanghai Composite and Hang Seng Index eked out minor 0.1% gains as Chinese retail sales came in above expectations; the Nikkei advanced 0.5% to hit a fresh 2016 high. European bourses are also green as a raft of CPI data were in-line to slightly above expectations; Italy’s MIB (+1.8%) continues to outperform.  Meanwhile, oil ($52.64/barrel) is down, COMEX gold has tumbled to $1157/oz., and the yield on the 10-year note has pulled back modestly to 2.47%.


  • Treasury yields rise across the maturity spectrum. Yields continued to grind higher last week, with long-term yields continually repricing assumptions about growth and inflation expectations for 2017. Short-term yields rose as the Federal Reserve Bank’s (Fed) Federal Open Market Committee (FOMC) meeting approaches and markets continue to adjust for a rate hike that is fully priced into fed funds futures markets. The increase in short-term rates has also continued to push Libor higher (now at 0.96%), which provided a tailwind for bank loans last week.
  • 10-year inflation expectations breach 2%. 10-year breakeven inflation expectations breached 2% last week, for the first time since September 2014. President-elect Donald Trump’s presumed plans for fiscal stimulus have been driving inflation expectations higher, while the continued recovery in the price of oil has also been a major factor. The majority of the increase in longer-term interest rates last week came from increasing inflation expectations, as opposed to increasing expectations for growth.
  • Municipals rally. Last week, municipal-to-Treasury yield ratios were attractive, as they exceeded 100% across most of the municipal yield curve. It didn’t take long for investors to recognize this, as municipals staged the biggest weekly rally since September 2013, post Taper Tantrum (based on the Barclays Municipal Bonds Index). Looking ahead, we expect municipals to be driven by crossover buyers that enter the market when ratios are high (usually over 95%), as these investors do not need the tax-exemption but desire the highest yields. The market should remain range bound and trade directionally with U.S. Treasuries until more clarity is provided related to Trump’s tax-cutting proposals.
  • High yield and EMD deliver solid week. High yield and emerging market debt (EMD) were standout performers last week (as measured by the Barclays U.S. High Yield Index and the Barclays EM USD Aggregate Index), with spreads in both asset classes declining during the week. Both asset classes were boosted by oil strength, which despite being down 0.4% last week, closed above $50 for the second straight week. Both asset classes are approaching meaningful spread levels above comparable Treasuries: EMD at 3% and high yield at 4%. These spread levels are important, at least psychologically, and may be points of resistance for these markets.
  • Policy may support investment-grade corporate bonds in 2017. In this week’s Bond Market Perspectives, due out later today, we delve into investment-grade corporate bonds and factors that will likely affect performance in 2017. We remain neutral on the asset class for reasons discussed in the piece, and despite our view for flat to gradually higher interest rates during 2017, the asset class may be supported by policy dynamics and lower supply than the elevated levels seen in the last five years.
  • Over the last month, the LPL Financial Current Conditions Index (CCI) rose 10 points to 223. The CCI has risen well off early-year lows and the most recent reading is its highest since May 2015, putting it near the middle of its seven-year range. A sharp rise in shipping traffic and a decline in the VIX (a measure of stock market volatility) were the largest positive contributors to the CCI’s November advance, while retail sales and the spread between the federal funds rate and short-term futures were the largest detractors. View the CCI.
  • Chinese data overnight continues to show a stabilizing economy. Industrial production increased 6.2% on a year-over-year basis, better than last month’s reading and expectations. Retail sales gained 10.4% on an annualized basis as well, again slightly better than both previous figures and expectations. Retail sales are an important indicator as they represent the strength of the consumer and because they can be independently verified. Overall, the data continue to show stability in the Chinese economy.
  • The strange year of 2016. What a year it has been, from the worst start to a year ever after 28 days (down 10.5%) for the S&P 500, to the huge post-election rally and new all-time highs. In fact, the S&P 500 has now gone 43 consecutive days without a 1% drop, one of the longest streaks going back 20 years. Here’s what is interesting: we’ve seen three such streaks of over 40 days this year alone. Most years have only one, if any. You have to go back to 1992 to find the last time a year had three different streaks of 40 days or more without a 1% drop.
  • What a start to December. As we noted at the start of the month, December is historically the strongest month of the year for equities. 2016 is keeping that going, with the S&P 500 up 2.6% after only eight trading days. As of now, this would be the best December for equities since 2010. The big question is: What does it mean if Santa comes early? Looking back to 1970, there are only four years that were up more after eight trading days than 2016 – they were 1970, 1971, 2000, and 2010. Is there a big pullback following early December strength? It doesn’t look like it, as the rest of the month was higher in three of those four years and the average return was 1.1% with a median return of 1.9%.
  • When do new highs happen? With the Dow making new highs for six consecutive days and various other indexes at or extremely near new highs, we will take a look today on the LPL Research blog at which months during the year new highs tend to happen. Even though we all know December is historically a strong month for the S&P 500, quite surprisingly it is also a month that doesn’t have that many new all-time highs. Looking at data from 1950 to 2015[1], the S&P 500 has made only 77 all-time highs in December, which ranks 9th out of the 12 months. Turns out, November sees the most new highs, as 122 new highs were made this month, which comes out to 9.2% of all days in November. Be sure to read the blog later today for a closer look at this phenomenon.

[1] Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.




  • Retail Sales (Nov)
  • FOMC Statement
  • FOMC Economic Forecasts and Dot Plots
  • Yellen Press Conference
  • Japan: Nikkei Mfg. PMI (Dec)



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