- Stocks continue treading water amid holidays. (10:25 am ET) U.S. markets are up slightly in early trading, marking the start of two holiday-shortened weeks. The S&P 500 inched up 0.1% last week; telecom was the best performing sector, advancing 1.3%, while real estate fell 1.3%. All four sessions were marked by low investor participation, and more of the same is expected this week. Little action was seen overseas Monday, as Japan’s Nikkei closed flat, while the Shanghai Composite slipped 0.3%; the Hang Seng was closed for Christmas. In Europe, major indexes are similarly unchanged; the STOXX Europe 600 is up 0.1%, while markets in the UK are closed for Boxing Day. Finally, the yield on the 10-year Treasury is up 2 basis points (0.02%) to 2.56%, WTI crude oil ($53.53/barrel) is up 1.0%, and COMEX gold ($1139/oz.) is moving higher by 0.5%, after Friday marked its seventh consecutive weekly decline, its longest streak in more than 12 years.
- 10-year Treasury moving in a tight range. Similar to equity markets, Treasury markets saw little volatility last week, as investors prepared for the long holiday weekend. After hitting resistance at 2.6% on December 16, the 10-year Treasury yield moved in a range of approximately 0.02% (2.54% to 2.56%) between Monday and Friday, the tightest five-day range since late September.
- Municipal bond fund outflows continue. Municipal bond funds saw more outflows for the week ending December 14th, with $3.7 billion leaving the asset class according to Investment Company Institute (ICI) data. This makes five consecutive weeks of outflows, with four of those five weeks exceeding $3 billion. Some of the outflows may be due to tax loss harvesting, as total returns for municipal bonds are negative year-to-date, according to the Barclays Municipal Bond Index. However, municipals did see a gain of 0.3% last week, and we will be watching to see if the traditional seasonal strength exhibited in the first few months of the year materializes.
- Emerging market debt spreads reconnect with oil. Commodity exports are an important part of many emerging market economies, making the price of emerging market debt (EMD) sensitive to the price of commodities, especially oil. For this reason, EMD spreads to comparable Treasuries have tracked the price of oil for a majority of the year. This trend had disconnected post-election, as fears of changes in trade policy from the incoming Trump administration led to increased spreads, though the relationship to oil has reconnected in recent weeks, perhaps signaling that markets are less worried about the immediate impacts of any potential trade policy changes. That being said, changes to trade policy do remain a risk for the asset class moving forward, leaving us neutral on EMD at this time.
- High yield spreads hit multi-year lows. The spread of high-yield bond yields to comparable Treasuries, at just over 4%, are near their lowest levels since September 2014. Spreads were even tighter prior to the crash in oil prices, hitting 3.2% in June 2014, indicating that prices could continue to increase from this point. However, we believe that a 4% spread level prices in much of the improvement in default expectations due to stabilizing oil prices and potential benefits from pro-business policies under President-elect Trump, leaving less room for error if any of these forecasts don’t materialize as markets expect.
- New home sales rise. New home sales rose to 592,000 in November, higher than October’s 563,000 and ahead of analyst expectations, but still below the expansion high in July 2016. Higher mortgage rates will be a headwind for housing in 2017, but looser credit standards and accelerating household formation by millennials are likely to compensate. Housing is only a small component of gross domestic product (GDP), but can have a positive impact on other sectors as consumers prepare a current home for sale or make added purchases when moving into a new home.
- Consumer confidence rises. The University of Michigan’s Consumer Sentiment measure edged higher in December to eke out a new expansion high. Unsolicited comments highlighting a better policy environment came in at record levels, doubling the rate of similar comments at the start of the Reagan administration. Despite the new high, confidence levels have been in the range typically seen mid-expansion since late 2014.
- That’s a slow week. The S&P 500 traded in a range of less than 0.5% each day last week. Using reliable intra-day data in 1970, that has never happened all five days of a week. A range of less than 0.5% has not happened since 12/22/14 to 12/30/14. In fact, six in a row has occurred only three other times since 1970. Friday traded in a range of only 0.22% – the smallest intra-day range since 0.21% on July 2, 2014 (the day before the July 4th holiday).
- Here comes Year One of the presidential cycle. The first year of the presidential cycle historically is the worst year of the four-year cycle for the S&P 500 since 1950, up 6.0% on average. The third year historically has been the strongest of the four years. With 2017 being the first year of a presidential cycle, could gains be muted? What is very interesting is recently the first year has been the strongest year, as since 1997 (the first year of Clinton’s second term) this year has averaged nearly 15%, above the 9.8% return seen during the third year. We will take a closer look at this phenomenon today on the LPL Research blog.
 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.
- Consumer Confidence (Dec)
- Japan: Retail Trade (Nov)
- Pending Home Sales (Nov)
- Initial Claims (12/24)
- Chicago Area PMI (Dec)
- China: Official Mfg. PMI (Dec)
- China: Official Non-Mfg. PMI (Dec)
- China: Caixin Mfg. PMI (Dec)