- U.S. markets begin week lower. (10:40am ET) Stocks opened on a weak note this morning despite upbeat results from Morgan Stanley and United Health. Markets were closed yesterday for the holiday, but the Dow ended flat on Friday while the S&P 500 (+0.2%) and Nasdaq (+0.5%) posted modest gains. S&P sector movements were also muted, driven largely by a rebound in interest rates, as financials (+0.6%) was the best performer and real estate (-0.3%) the worst. Overseas Monday night, the Nikkei shed over 1.5%, dropping to a new low on the year, while the Shanghai Composite (+0.2%) posted a minor gain. European shares are mixed in afternoon trading, although comments from Prime Minister Theresa May have boosted the British pound and lowered the FTSE 100 by 1%. Elsewhere, WTI crude oil ($52.76/barrel) is up 0.7%, COMEX gold ($1214/oz.) is up 1.5% on precious metals demand, and the yield on the 10-year Treasury note is down to 2.33%.
- Treasury yields move higher through Thursday but finish the week flat. Treasury yields fluctuated on the week with the yield on the 10-year note starting and ending the week just under 2.4%. Prices moved higher based on the success of Wednesday’s $20 billion 10-year Treasury auction, which saw foreign buyers (indirect bidders) buy 70.5% of the auction. Friday opened weaker as Thursday’s $12 billion 30-year auction was not as well received as the 10-year auction, but foreign participation was still significant at 66.7%.
- Yield curve steepens for week. The 2-year Treasury fell by 1 basis point to 1.21%, while the 10-year finished the week unchanged. This brings the 2-year/10-year slope, a measure of the steepness of the yield curve to 121 basis points (1.21%), higher on the week by 1 basis point (0.01%). A steeper, more positive yield curve generally indicates that the market anticipates higher interest rates and more growth. As such, investors require more yield as they move longer on the yield curve. The 2-year/30-year steepness was also wider on the week by 4 basis points (0.04%) to 180 basis points (1.80%).
- Inflation expectations remain range bound near 2%. Inflation expectations ticked up slightly from 1.95% on Monday to 1.99% on Friday. This is near the highest reading year-to-date, however the number has yet to hold above the Federal Reserve Bank’s 2% target. We continue to monitor oil prices, which could drive headline inflation above 2% over the course of the year.
- Municipals outperformed U.S. Treasuries on the week. Municipal bonds, as measured by the Barclays Municipal Bond Index, outperformed U.S. Treasuries as measured by the Barclays US Treasury Index on the week. The 10-year muni finished the week lower in yield by 5 basis points (0.05%) to 2.28%, down from 2.33% on Monday. The longer 30-year maturity also finished lower in yield by 5 basis points. Declining municipal yields led to 10-year and 30-year AAA municipal to Treasury ratios that are on the expensive side of their recent range, finishing the week at 93% and 99%, respectively. We discuss the municipal market in more detail in this week’s Bond Market Perspectives, due out later today.
- High-yield spread holds below the 4% level. High-yield spreads ended the week just below 4% as measured by the Barclays High Yield Index. The additional yield offered by high yield bonds remains attractive in a low-yield environment, though high-yield spreads are pricing in a lot of good news, leaving less room for error for the asset class.
- Preferred stocks rebound. Positive earnings expectations for financials (which are heavy issuers of preferred stocks) and lower rates helped the Merrill Lynch Preferred Stock Hybrid Index continue its recent uptrend last week, returning 0.7% to beat the Barclay’s U.S. Aggregate Bond Index by 0.5%. Year-to-date, preferreds, as measured by the index have returned 2.6%, regaining some strength after a weak fourth quarter that returned -4.6%.
- Manufacturing still moving higher. Aided by a turnaround in oil production, a relatively stable dollar, and better economic performance overseas, manufacturing began to stabilize at midyear 2016, and over the past few months, the data suggest some modest reacceleration. The January 2017 readings on the Empire State (+7) manufacturing survey matched expectations and the December 2016 reading. The readings on the Empire State Manufacturing Index in the past few months were the highest in nearly two years. Although manufacturing accounts for less than 20% of economic activity and employment in the U.S., it has a much larger impact on S&P 500 earnings, and therefore, equity markets.
- Is small cap strength sustainable? Small caps have surged since Election Day, with the Russell 2000 Index outperforming the large cap S&P 500 by 8.5% since November 8, 2016. Given the magnitude of small cap outperformance, investors with previously established small cap stock allocations may want to consider waiting for a dip before adding to positions. The relative strength has been driven by several election-related factors, including prospects for tax reform, deregulation, and President-elect Trump’s focus on encouraging U.S. manufacturing. In our latest Weekly Market Commentary, we discuss whether small cap strength is sustainable.
- First busy week of earnings on tap. With results from 29 companies in the books, S&P 500 earnings growth is tracking to 6.2%, driven by financials and technology. The earnings beat rate is a solid 72%, while revenue results have brought more misses than hits so far with a beat rate of 34%. Another 34 companies report this week (January 17-20), dominated by financials and industrials.
- How slow is slow? Going back to 1950, the +7.8% rally in the Dow from the Election through year end was the third-strongest rally ever. Yet, over the past month the Dow has held close to the 20,000 level, unable to break above. At the same time, it isn’t selling off either – instead trapped in an incredibly tight range. In fact, using closing prices back to 1900, the Dow has traded in a range of only 1.07% over the past 21 trading days, which is the tightest monthly range ever. Looking at reliable intraday data going back to 1970, the range over the past month has been only 1.42% – again the smallest monthly range ever. Lastly, this is so rare because the Dow has closed within 1.5% of its all-time high for 45 consecutive days – one of the 10-longest such streaks ever. Today on the LPL Research blog we will take a closer look at this phenomenon.
- Empire State Manufacturing Report (Jan)
- Dudley* (Dove)
- Germany: ZEW Survey (Jan)
- World Economic Forum begins at Davos, Switzerland
- CPI (Dec)
- Kashkari* (Dove)
- Yellen* (Dove)
- China: Property Prices (Dec)
- Philadelphia Fed Index (Jan)
- Yellen* (Dove)
- Eurozone: European Central Bank Meeting (No Change Expected)
- China: GDP (Q4)
- China: Industrial Production (Dec)
- China: Retail Sales (Dec)
- China: Fixed Asset Investment (Dec)
- Inauguration Day
- Harker* (Hawk)
- U.K.: Retail Sales (Dec)