Boxed In!

Boxed in!  It was more holiday joy in yesterday’s Boxing Day session as stocks rallied to fresh highs on positive retail news and high hopes for a trade deal.  The legendary Santa Claus rally looks to notch another one for the record books.

N O T E W O R T H Y

• Where’s my stuff?  Amazon led the financial news cycle yesterday after it announced a record holiday season.  The company reported that the number of packages it delivered in its Prime Next Day or Same Day services nearly quadrupled since last holiday season.  Wow, that’s a lot but, admittedly, not too surprising.  The announcement helped drive the major indexes up yesterday and Amazon’s stock rose by +4.45% in the session.  Good news for Amazon, but also good news about the consumer.  Yep, there it is again, my obsession with the consumer.  Once again, and for the record: the consumer is critical to a growing economy.  The current economic expansion, now a record in length, is attributed to none other than the consumer.  Want more proof?  Corporate investment or expenditure has been weak for some time and has been on the Fed’s worry list.  On Monday, the Census Bureau announced Durable Goods Orders which missed growth expectations and came in with a pullback of -2.0% after growing by just +0.2% last month.  Durable goods are large items which are purchased by all types of buyers but are typically associated with corporate investment.  So all the good news about progress in trade has not given corporations enough confidence to join their consumer cousins in the great expansion.  We will have to classify the Amazon news as another sign of consumer confidence.  As we pass through this record holiday season and close out the year and the decade, I am still left wondering when the consumer will decide to take a break.  If my post-holiday-eating-binge diet plans are any indicator, the great consumption could slow in the months ahead.
• Hi, yield.  Treasury yields continue to perplex investors. In a year where bonds were supposed to go down, they rallied along side of stocks, which is rare, really rare. Demand for US debt remains high as it represents a strong alternative to the increasing amount of negatively yielding debt around the globe.  The US economy, though sluggish still clocks in as one of the strongest in the current cycle making US debt yet more attractive.  Finally, there is… or was that fear of a looming recession.  When investors fear a slowdown in the economy and low inflation they buy bonds.  The first half of 2019 was marked with considerable recession fears as investors watched the yield curve invert.  Those fields drove bond prices up and yields down.  Then the Fed took action lowering rates in three consecutive moves giving investors confidence that a recession might be avoided.  Since then treasury bonds have fallen slightly and their yields have been climbing.  Ten-year treasury yields are currently around 1.88% and starting to look more attractive once again. That is, when compared to the S&P500 which has a dividend yield of 1.81%.  There is a slightly different story when it comes to corporate debt.  Demand for US corporate debt has been strong all year and continues to be in high demand.  Check out the bottom panel of chart 17 in my attached daily chartbook.  When a bond’s spread to treasuries narrows, it is an indication of strong demand and prices rising faster than higher quality government-backed debt. The high yield bond index started out 2019 trading at a spread of around +5.3% and is now around +3.5%.  That means that investors are paid only 3.5% more than treasuries for taking on junk debt.  More signs of investor confidence and bullishness.

THE MARKETS

Stocks traded to new highs yesterday bringing the Santa Claus rally another session closer to reality.  The S&P500 climbed by +0.51%, the Dow Jones Industrial Average traded up by +0.37%, the Russell 2000 slipped by -0.02%, and the NASDAQ Composite Index advanced by +0.78%.  Bonds rose slightly and 10-year treasury yields remained flat at 1.88%.

NXT UP

– Next week will be a short market week with an early close for New Years Eve and closure on New Years Day.  We will get a number of economic releases which include housing numbers, regional Fed reports, the Conference Board’s Consumer Confidence Index, manufacturing PMI’s, Construction Spending, and the minutes from the Fed’s last FOMC meeting.  Check back on Monday for details.

daily chartbook 2019-12-27