The bet that single party control in Washington D.C. will result in big deals on taxes and regulation continued unabated last week.  As we’ve stated, with all politics, reality falls somewhere between changes at the margin and the sweeping changes promised through campaign rhetoric.  We do know that markets overshoot but, at the same time, animal spirits can thrive so best course here is not to chase, stay the course, and allow markets to calibrate as the unknowns become more tangible.  Anecdotal highlights on the week are as follows:

  • Equity markets, particularly small caps, rallied despite surges in the US dollar (+2.6%), its highest mark since 2003, and interest rates. Smaller caps, lower valuation, and high short interest stocks have been leading the way. The Russell 2000 has gone parabolic with 10% gains and 10 consecutive positive days.
  • The post-election rally has been concentrated in financials (+10.8% on higher rates) and industrials (+5.1% on infrastructure spend). Utilities, staples, REITs, and tech are all down since November 8th.
  • Fed looks set for a December hike with contracts pricing in a 96% likelihood. Remember that higher rates and stronger dollar are tightening agents on U.S. growth which tend to unsettle markets. • The strong U.S. dollar continued last week.  China’s renminbi fell to an 8 year low. In U.S. markets, the lowest international revenue oriented stocks are up 3x more than the high international revenue counterparts.
  • Bloomberg estimated that this has been the worst two-week stretch for global fixed income in 25 years and ranks in the top ten worst two week stretches for the U.S. bond market since 1989 – in all nine of the other occurrences, the bond market posted positive returns one year out.
  • AAII bullish sentiment survey broke out of a record 54 consecutive weeks below 40% and jumped to 46.7%. Only two other times since the 2009 bull began have we seen a two week shift of this magnitude.
  • On Tuesday, the USGS announced a massive oil find in West Texas, the Wolfcamp shale. Estimates are 20 billion barrels of oil and 16 trillion cubic feet of natural gas, nearly 3x what was found in North Dakota’s Bakken shale in 2013.
  • U.S. oil production and inventories have increased while the Russian oil minister said there is a good chance of an OPEC/Non-OPEC production quota agreement.
  • Crack spreads (refining margins) have moved from $16.21 to $11.40 since November 1st, a brutal blow to refiners.
  • Estimates of the growth and inflation impacts of Trump’s fiscal stimulus (tax cuts and infrastructure spend), trade initiatives, and immigration policies are coming in from all directions. We will be assessing these and providing initial thoughts in the coming weeks.
  • The economic scorecard for the week was positive at the margin.
    • October headline/core CPI inflation registered 1.6%/2.1% respectively.
    • Wage growth has outpaced inflation by 3% over the past year.
    • Housing starts were strong, posting their highest level since August 2007 and strongest beat relative to expectations since January 2006. M/m starts were up 25%, the strongest month since 1982.  Most were multi-family units, not single family residential.
    • Labor market strength is off the charts. S. weekly new jobless claims crushed expectations (235,000 vs 257,000), the lowest weekly result since 1973.  The nonseasonally adjusted figure was 225,400, lowest since 1969, 140,000 below the weekly average since 2000. Continuing claims are at their lowest level since 1977.
    • October retail sales surged 4.3% y/y pushing 4Q GDP growth estimates higher. Online sales grew 12.9% over the same period.