Market Commentary 1/5/18

With the first week of trading in the books, the Dow, Nasdaq, and S&P 500 all closed at record highs. Short-term and long-term yields continue to compress with the so-called 2-year to 10-year gapping by only 50 basis points. A flattening yield curve normally suggests the economy is moving into the later part of the economic cycle and that less risk should be taken. However, animal spirits remain alive and well.

On the jobs front, there was some concern after Thursday’s ADP report blew past expectations that the December Jobs Report would come in “extremely hot” much to the demise of bond yields. The top-line report data fell short of expectations with 148,000 jobs created versus 188,000 expected. The unemployment rate came in at 4.1%. However, the November jobs numbers were revised higher and the body of the report showed some positives such as average hourly earnings rising 0.3% from November’s 0.2% and increasing 2.5% year over year, above the 2.4% annually in November. Should wage earnings move higher, rates will continue to move higher as well.

There are varying opinions on where the US is in the economic cycle. Certainly the massive central bank stimulus over the last decade has distorted asset prices and has kept yields artificially low. True price discovery has become difficult to quantify. The pro-growth argument is supported by synchronized global economic growth, pro-business tax reform, and low global interest rates. For those less bullish, there is concern about the flattening of the yield curve, the Fed’s determination to tighten rates, and the expansion of the price earning ratios on stocks, as well as low-cap rates in real estate and increasing consumer debt.