The Dow, S&P 500, and NASDAQ all notched new record highs last week. Overall, equities were mixed with tech and energy stocks posting nice gains while small caps lost ground. The yield curve flattened meaningfully with short rates (2yr +0.04%) moving higher while long rates (30yr -0.11%) fell. The U.S. dollar was flat on the week while commodities, particularly oil, moved higher. Oil is now back above $55/barrel, up 28% from the late June level of $42. Last week also saw a good amount of central bank activity with Fed, BOJ, and BOE meetings.

Market Anecdotes:

  • The House released its initial tax reform plan including a business-friendly reduction in corporate tax rates and opportunity to repatriate overseas earnings. Highlights on the personal income tax side include reduction tax rates and limitations on deductions. The proposed bill now goes to Ways and Means committee while the Senate works to release its version.
  • The Fed met this week and took no action as expected. The next meeting is December 13th where futures markets are pricing in a 96% likelihood of a 25bps rate hike.
  • Jerome Powell was nominated to succeed Janet Yellen as the new Fed Chair – viewed as a safe choice (from Trump?) and most likely to navigate the Fed in a similar fashion to Janet Yellen as opposed to some other more hawkish candidates.
  • Interestingly, Powell is not a PhD in economics, but his job will be to make a case to a room full of PhD’s in economics. He is the first Fed Chair since Volcker not to come in with a doctorate. The lack of written academic work or speeches mean he is a lesser known quantity coming in than his predecessors.
  • The BOE made a hawkish move and voted to hike rates by 25bps for the first time in a decade in response to rising inflation pressures despite some evidence of weakening economic signals.
  • The BOJ voted 8-to-1 in favor of keeping the foot on the gas by holding interest rates at -0.1% and pledging to buy Japanese government bonds so 10-year JGB yields will remain at 0% (yield curve control). The Nikkei is up 20% since September.
  • The S&P 500 needs only 6 more days to break the 500-day mark without a 5% correction and 7 more days will break the record for the longest streak without a 3% correction (370 days).
  • 80% of companies have announced third quarter earnings and revenues, both on pace for 5.8% growth. Guidance has had a positive skew thus far. If it holds, it would mark the third consecutive quarter of positive guidance, something that hasn’t happened since the early bull market days of 2010/2011.
  • High yield spreads hit post crisis lows last week of 3.4%. Investment grade credit spreads are also at cycle tights.
  • Oil broke out to new 1-year high last week, back up over $55 on another tight inventory report from the EIA.

 

Economic Release Highlights:

  • U.S. employers in October added their most workers in a year and the unemployment rate fell to 4.1% – its lowest level in 17 years. The 261,000 jobs fell short of the 331,000 expected by economists.
  • The four-week average jobless claims figure of 229,000 is at its lowest level since 1973.
  • Average hourly earnings were weak again in October, growing by 2.4% year-on-year, versus expectations of 2.7%. • The ISM Manufacturing Index cooled slightly in October to 58.7 from September’s 13 year high of 60.8.
  • The ISM Non-Manufacturing Index accelerated to 60.1 in October, marking the fastest rate of growth in 94 months. Services make up 80% of our economy so this is a notable sign of strength.