Equity markets maintained a positive trend in the Thanksgiving holiday shortened week, posting a third consecutive week of gains while interest rates trended sideways (10yr -0.01%) and high yield spreads tightened 0.18% to 4.66% over Treasuries.  The speed of the rally and significant shift in sentiment so far in advance of tangible policy outcomes of the new administration are notable given the looming December Fed rate hike and Italian referendum taking place over the next two weeks.

  • The surge in the S&P 500 over the past two weeks has pushed it well over two standard deviations above its 50-day moving average and to a new bull market high trailing P/E ratio of 20.66x. The DJIA hit 19,000 for the first time ever.
  • Small caps are on a 15 day winning streak, up 15.8% over the past three weeks.
  • The front end of the Eurodollar yield curve has steepened over the past few weeks, implying a faster pace of Fed rate hikes. Since August, we’ve gone from two hikes by year end 2018 to four – a significant increase in Fed rate hike expectations.
  • An ‘of interest’ market internal is that the KBW Bank Stock Index has rallied sharply since the election; while a basket of investment grade financial sector bonds are singing a very different tune. Option adjusted spreads on a broad basket of investment grade bank bonds have actually widened from 109 to 114 over the same period.
  • According to Goldman Sachs Group Inc. strategists including Ben Snider and David Kostin, hedge funds are on track to underperform the S&P 500 for an eighth consecutive year.
  • Expectations for higher growth in the U.S. have lit a fire under the USD, hitting 13 year highs last week as measured by the ICE Dollar Index.
  • On a net basis over the past 18 months, Lipper reports approximately $130b has left domestic equity mutual funds and ETFs. The beginnings of a technical/sentiment reversal of those flows may be supportive of equity markets in the near term as investors chase performance.
  • The AAII measure of bullish sentiment climbed over 50% for the first time since January 2015, not an encouraging note from a contrarian perspective. The bullish camp has now expanded for three straight weeks.
  • Global oil prices have been influenced by a return of U.S. production and a healthy dose of skepticism as to whether OPEC/Non-OPEC producers will be able to structure a production quota deal on November 30.
  • Economic releases were relatively limited on the week. Results were positive on margin with highlights as follows:
    • October existing home sales of 5.6M beat expectations climbing 5.9% from a year ago and posted the strongest monthly activity since February 2007.
    • October new home sales declined 1.9% to 563,000, missing expectations of 590,000. Sales on the year are up 17.8% pointing to overall strength in the market.
    • October (M/M) durable goods jumped 4.8%, its biggest jump in a year, handily beating expectations of 1.5%.  Yr/Yr change for October was +2.1%.