Stocks little changed. U.S. stocks are little changed this morning after the S&P 500 Index notched its 11th record high since the end of October. The benchmark gained 0.75% on Monday after China announced it would tighten rules on intellectual property. There are more signs of trade progress today, with reports that the United States and China held a phone call on a “phase one” deal. Even though that headline hasn’t materially moved stocks, we expect financial markets to take their cues from headlines amid a few days of low volume.
Welcome to the party, small caps. It finally happened: Small caps broke out to a new 52-week high Monday, gaining a very impressive 2.1% along the way. There are many more small cap stocks than large cap stocks, so wide market participation in this current rally is yet another positive sign for the bull market. Small caps could also continue to play catch up with the Russell 2000 Index, still nearly 7% away from an all-time high. We’ll look at small caps’ breakout later today on the LPL Research blog.
Another step back for yields. The 10-year U.S. Treasury yield declined for a second straight week last week as a global slide in equities increased appetite for safe-haven assets. Similar to stocks, U.S. yields have taken cues from trade and geopolitical headlines lately. We still think trade and geopolitical progress could keep a floor under U.S. yields, but it could take some time for the 10-year yield to move meaningfully higher amid global buying pressure in Treasuries.
Yield curve flattens. The U.S. Treasury yield curve has gradually flattened over the past two weeks as long-term yields have declined. The spread between the 2-year and 10-year yield fell to 15 basis points (0.15%) through the end of last week, while the spread between the 3-month and 10-year yield slid to 17 basis points (0.17%). The yield curve may have trouble steepening in the near term as markets price in a Federal Reserve pause, which could keep short-term yields stuck at current levels.
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