Market Observations for December 2016
November was a very active month. The biggest movement came from the jump in interest rates. The 10-year US Treasury jumped from 1.83% to 2.37% in the month. This was a trend that had begun back in July when the 10-year dropped below 1.4%. Much of the movement however was post presidential election. The US dollar index also jumped in November, which makes imports cheaper, but is a headwind for overseas investments. Needless to say, November was a month of recalibration to expectations under a Donald Trump presidency.
The jump in rates could be from new expectations of greater growth. Or it could be from greater expectations of inflation which are also embedded in the interest rate yield. This is more inline with the view that fiscal policy will require deficit spending and at a time when we are essentially at full employment.
Surprising to many market observers including this one, the US stock market was reasonably strong in November despite the unexpected outcome in the Presidential election. The S&P 500 was higher through the month and currently bouncing around all-time highs. While recent prices can be justified based on the high level of dividends and share repurchases, limited earnings growth dampens the potential for continued upside.
The strongest performance most likely came from small companies, which are to a degree isolated from rising interest rates (i.e. they don’t borrow as much) or a strong dollar (i.e. they have mostly domestic sales). The last time we saw such strength was in 2013 when the 10-year US Treasury increased rapidly driven by communication from the Federal Reserve.
It is too early to tell how these new expectations will pan out. As we saw with interest rates, after peaking at 3.0% in December 2013, the 10-year US Treasury declined to 1.35% in July of this year. Saying that, it is clear that most economic data points to about as normal of an economy that we’ve seen since the Great Recession. Unemployment was just reported at 4.6%. These are levels that economist believe is full employment before it becomes inflationary.
At the end of the day, the market really is a voting machine in the near-term and a weighing machine in the long-term. We have nothing to weigh until President-elect Trump begins his brand of fiscal and international trade policies.