Published December 9, 2016
We have written a few times how the tremendous decline in energy earnings was pretty much the sole reason for the quarters-long negative streak in earnings for the S&P 500. Liz Ann Sonders from Charles Schwab wrote this week about the improving outlook for earnings and how that improvement has underpinned the recent stock rally. Here is what Mrs. Sonders had to say:
You?ve Got to Earn It: Valuations Aided by Improving “E”
The yield curve steepens
Economists and market analysts look to an inverted yield curve as a harbinger of a coming recession. The yield curve displays interest rates for bonds out in time, going from as short as three-months to as long as thirty years. Normally, interest rates are higher as you go further out due to greater uncertainty of the future among other factors. To get an inverted yield curve, short term interest rates need to be higher than medium-term rates. That obviously is the opposite of the normal structure as the near-term uncertainty outweighs the longer-term uncertainty. Inflation expectations also play a part as does simple supply and demand for bonds. Nevertheless, a yield curve that flows up and to the right is the norm and is generally indicative of expected economic growth. Over the past month, interest rates have pushed quickly higher making the yield curve “steep” with rates out in time higher compared to short-term rates than they were before. That steepening yield curve is great news for banks, which is one reason why bank stocks have been roaring upward. Here is how the yield curve has changed over the past month:
Chart 1: the yield curve gets steeper and higher
Market Update
Stocks entered the week after their first down week since the election. There was some concern that Sunday night’s vote against Italian Prime Minister Renzi would rattle investors. However, Monday’s action showed that investors were more concerned with buying the dip in the market. Stocks resumed their march upward with the Nasdaq outperforming for the first time in awhile sporting a +1.0% advance. The gains were added to in Tuesday’s trade with little news but another +0.3% lopped on to the rally. Stocks were even stronger Wednesday with the S&P 500 rising +1.3% with an upbeat outlook in the tech sector offsetting weakness in biotech on renewed fears of drug price regulations.
Thursday brought strength in retailers and a fifth straight gain for stocks; this time with a +0.2% lift. Investors made it six in a row Friday on little news, but with a notable rebound in recently lagging sectors like consumer staples and healthcare. Stocks closed the week with another +0.6% gain.
Warm wishes and until next week.