Weekly Market Update
Weekly Market Update (Week Ending December 2nd, 2016)
Bon(d)-Fire
The stock market momentum since the U.S. Presidential election has finally cooled somewhat. The Dow Jones Industrial Average finished the week up fractionally while the S&P 500 declined about 1%. Markets are still near all time highs. Small cap stocks, which have been the strongest of late, declined a little over 2% for the week.
The real story, in my opinion, resides within the bond market. Since the election we have seen relentless selling of bonds across the spectrum. The 10-Year Treasury bond has added 61 basis points (0.61%) in yield over the last month and almost a full percent since the summer. That means you can now earn 2.38% buying a 10 Year U.S. Government Bond today vs. getting only 1.38% over the summer. This has put significant pressure on bond prices. The municipal market taken the brunt of the selling as municipal prices have hit a two-year low.
All of this seems to be related to Donald Trump and what his "potential" policies may mean for financial assets. I'm just guessing here, but perhaps the expectation of lower tax rates has caused the demand for municipals to weaken. Perhaps additional fiscal spending will add to an already indebted government, which would mean more supply and lower prices in the treasury market. Or maybe the policies of the president-elect will finally ignite growth and inflation, something that has been quite muted during the recovery since the great recession.
In any event, markets often try to discount the future and I think everything has gotten a bit ahead itself. I'm not certain economic problems have been resolved simply with the election, but I do believe it won't be politics as usual and maybe, just maybe that is what the economy needs.
In other news, the employment report was released on Friday showing the U.S. economy added 178,000 jobs in November. The unemployment rate fell to 4.6%. However, earnings dipped slightly and that continues to be the problem.
As is often the case in markets and economies, there is always something to look forward to that could be market moving. This weekend Italy is holding a referendum on whether or not they want to amend their constitution and the Federal Reserve meets December 14th. It is widely expected that the Fed will lift interest rates at the December meeting.