Our instincts tell us we’ll need to remind ourselves and clients many times of the importance of suppressing political biases, of all stripes, and embrace cold, calculating analysis when it comes to investing. We’ve clearly shifted to a high stakes approach and new level of rancor and biased propaganda, from both left and right, on topics ranging from impactful policy initiatives to trivial matters. The current mix of pro-growth (tax code reform, streamlining regulation, fiscal spending) and anti-growth (restrictive trade, tariffs, anti-immigration) initiatives are in the nascent stage at this time. It’s too early to determine whether the stock or bond markets have overshot. Ultimately, liquidity matters more than valuation and that backdrop remains constructive. Depending on your risk thresholds, this is a stay the course or subtle rebalancing environment.

Your Weekly Anecdotes:

  • The DJIA finally hit the symbolic 20,000 mark last week, after nibbling at it for the past several weeks. Many who recall the DJIA hitting 10,000 in 1999 probably didn’t think 18 years would pass for another double to 20,000.
  • The post-election rally of the DJIA has been impressive – in fact, it’s the best performance in the first 6 weeks post-election among all elections since 1900, surpassing Coolidge ‘24, McKinley ‘00, Bush ‘04.
  • Last week, U.S. drillers added the most rigs in nearly four year, according to data from Baker Hughes. OPEC cut production and the U.S. is stepping right in, thank you very much.
  • Bonds have been in a bull market since September 1981, when 10-year Treasury yields hit 15.8%. Within that 35year downtrend, however, there have been at least nine periods when yields rose substantially—that is, by more than 100 basis points or at least 25% from starting levels.
  • Bianco Research points out that US Treasuries’ swift rise in yield is potentially being exacerbated by selling pressure from major foreign investors like China, who have been net sellers of UST since the August 2015 yuan devaluation. The percentage of major foreign investors selling treasuries versus buying (trailing 12-month basis) reached its highest in history November 2016 at 75%.
  • Profits in the S&P 500 are on pace to rise at the fastest pace in two years, welcome relief for investors facing the highest valuations since the aftermath of dot-com bubble.
  • Debate surrounding reinvestment of interest income of the Fed’s $4.5t balance sheet is surfacing as a potential tool, along with rate hikes for the Fed to consider moving interest rates higher.
  • Market based five year breakeven inflation rate (the difference in nominal and inflation-adjusted Treasuries of the same duration) topped 2% for first time since 2014 last week. Realized inflation growth globally is at strongest point since 2010.
  • High-yield issuance remains strong into 2017, however investor flows are slowing into high-yield ETFs. $25b so far (5x over this point last year) and biggest CCC issuance since 2011.

Your Weekly Economic Updates:

  • 4Q GDP grew 1.9%, missing consensus expectations for 2.2% growth. Private inventory build contributed a full 1% to the 4Q growth rate, which will have to be worked off in future quarters. • PCE (personal consumption expenditures) rose at a 2.5 percent pace, a positive sign that the U.S. consumer spending remains healthy, although down from 3.0 and 4.3 percent in the prior quarters.
  • National Association of Realtors reported that US existing home sales fell 2.8% as supply hit a 17-year low. This follows November’s figure, which was the highest monthly total since 2007. Overall, 2016 registered 5.45 million units sold, the highest mark since 2006.
  • Residential investment grew at a very strong plus 10.2 percent rate.
  • Business investment posted a very welcomed increase of 2.4 percent for the third gain in a row.
  • December durable goods report disappointed at -0.4% – 2.6% expected. A 64% downswing in defense aircraft was the primary reason, reversing a similar upswing in November.