The three week post-election equity market rally finally took a breather last week while the bond market logged a fourth consecutive weekly loss.  Longer term rates, in particular, rose on speculation that the U.S. will entertain issuing 50 or 100 year treasury bonds.

Market Anecdotes:

  • 98% of S&P 500 reported for Q3. 72% and 54% of companies beat mean estimates for earnings and revenue respectively. Earnings grew 3.2% year over year, the first time since Q1 2015 of positive earnings growth.  The 12 mo forward and trailing P/E ratios are 16.8x and 20.45x respectively with a forward estimate of $131.19 EPS.
  • On Sunday (12/4), Italian voters are being asked whether to strip the upper house (Senate) of much of its power to smooth passage of legislation. The outcome should hit the wires at approximately 1am EST. Polls (for whatever they are worth) are projecting the NO vote to prevail.  Longer term implications include the potential for an “Italeave” referendum for Italian voters to consider if the populist party (5 Star Movement) comes into power – this would not bode well for the EU, euro, or Italian banks.
  • WTI spiked 12.4% last week to $51.67 on an OPEC and Russian agreement to cut output by 1.2 million barrels beginning next year. Non-compliance of OPEC members and increased production in the U.S. make projecting 2017 output a soft science but the agreement should provide support for $50 oil in the near term.
  • China has been suffering from capital flight since the summer 2015 corruption crackdown by President Xi Jinping. Heavy handed tactics (arrests of billionaires, authors, activists) and aggressive market policies have become more common as wealthy Chinese investors and companies are seeking to move money out of the country. However, China stands out as one of a very few non-U.S. stock markets that have done well since Trump’s election.
  • Pre-election market leadership was dominated by technology, energy, and utilities. Post-election has seen significant rotation out of technology and utilities into financials (deregulation), consumer discretionary (tax cuts), and industrials (infrastructure and defense spending) while energy has remained strong. Essentially out of high growth/high P/E into low growth/low P/E stocks.
  • The probability of a Fed hike at the upcoming December meeting is approximately 95%. Most of the focus on the Fed will not be on whether rates are increased but instead, the narrative and whether their economic forecast squares with the more optimistic financial markets or less optimistic fundamental data?
  • Going back to 1962, the average rate on the 10yr U.S. Treasury was 6.32%. In the ten year period leading up to 2007 peak, the average yield was just under 5%.

Key Economic Releases:

  • The second estimate of 3Q GDP came in slightly higher at 3.2%, marked by higher consumer spending and lower inventory draws.
  • October PCE and core PCE registered 1.4% and 1.7% respectively. The October reading for PCE was the highest yearly rate in 2 years.
  • Monthly consumer income grew more than expected, up a strong 0.6% while spending fell short of expectations at 0.3%.
  • November ISM manufacturing index registered a healthy reading of 53.2, indicating an expanding manufacturing sector.
  • November consumer confidence registered a new cycle high of 107.1, the highest mark since July 2007 and comfortably above expectations for 100.8.
  • The November jobs report kept the longest ever streak of job creation intact for a 73rd consecutive month, unemployment fell to its lowest level (4.6%) since Aug ’07.