Equity markets kicked off 2018 on a positive note with all market sectors apart from defensive oriented utilities and consumer staples posting gains. Both oil and U.S. Treasury yields moved higher as well. Yields moved notably higher in more of a parallel shift on the back of stronger economic data and the added boost of fiscal stimulus. The bond market may be starting to believe in higher growth and higher inflation.

Market Anecdotes

  • The Fed released December meeting minutes revealing a non-unanimous 7-2 vote in favor of the December hike, discussion that fiscal stimulus may increase pressure to increase the pace of rate hikes, and reaffirming expectations for three hikes in 2018 and two in 2019.
  • The S&P 500 has long since broken the record for most consecutive days without a 3% pullback and is just over two weeks short of the 394-day record without a 5% pullback.
  • The S&P 500 P/E multiple nearing 23x, a level never attained during the 2002-2007 bull market. P/E multiples were consistently above 23x during the final three years of the bull market ending in early 2000, moving from 23x to over 30x in the Dot Com bubble. While rich, investors must always note that high valuations alone are not a catalyst for corrections or bear markets.
  • Holiday sales estimates reported last week show a 4.9% increase overall, which would represent the strongest holiday sales season in six years.
  • To date, analysts have held off on updating earnings models in light of the yearend tax package. Each company individually will have to decide how to utilize the relief, so the bottom line impact will take several weeks and months to take shape. Dividends, new hires, new equipment, expanded operations, and acquisitions are possible avenues for corporations. Whether individuals chose to save, invest, or consume also factors largely into the forward view.
  • Protests in Iran factored strongly into the oil rally to begin the year. While Iran’s oil fields have been unaffected thus far, trades see renewed risks in OPEC’s third biggest producer.
  • MFID – The Markets in Financial Instruments Directive II, the largest overhaul of European financial markets in years, came into force last week without any hiccups. The regulation impacts nearly every aspect of securities trading in effort to improve pricing transparency, market liquidity, and dubious market making activities.
  • Bond volatility MIA… The 165-day trading range of the 30-year U.S. Treasuries has reached its tightest trading range in recorded history, a mere 31.4 basis points. 150-day total return volatility of the U.S. 10year note is also nearing a historical low level of 4.5%. Not since the 1980’s has volatility remained so low for so long.

Economic Release Highlights

  • December’s employment report was somewhat disappointing, registering 148k versus 190k expected. A closer look however shows a BLS change in the seasonal adjustment figure for December accounted for a -133k influence on the result.
  • Weekly jobless claims rose for the third straight week to 250k, the highest print since 11/10/17. Regardless, weekly claims have remained well below the 300k level for 148 straight weeks.
  • Headlined by a 14-year high for new orders, ISM’s manufacturing index rose 1.5 points to 59.7 in December, driven by a 14-year high for new orders. New export orders also climbed higher to 58.5, a strong reading on overseas appetite for U.S. goods.
  • The ISM non-manufacturing composite index declined to 55.9 and missed expectations for 57.6.