Published December 20, 2019
Investors continue to be willing to take on more risk. Now that the “phase one” trade deal with China appears to be completed, the UK election results are in, and the Federal Reserve projects being on hold for quite some time, investors have breathed a collective sigh of relief. What that looks like in the markets is the following:
1) a volatility (“risk”) index reaching its lowest level in two years (circled below),
2) high yield bonds jumping such that a ratio of investor willingness to take risk shoots upward.
This chart plots a ratio of high yield bonds (HYG) to 10-year U.S. Treasury bonds (IEF). You can see that after a couple of false starts earlier in 2019 (the blue square), December is showing a big leap upward (the pink circle), which continues a five-month trend.
While we are in a strong seasonal period for stocks, we also note that many of the concerns plaguing the market have been seemingly resolved. This has led to the market records we have recorded in recent days. The question now is what new catalysts will emerge to drive prices further upward. It could be just a modest rise in interest rates squeezing money out of bonds and into riskier assets, as we see happening above. Or a turn upward in global economics, which the earnings coming in January will report on. Regardless, this shift in sentiment is positive for stocks.
Stocks continued their march higher Monday with a +0.7% rise fueled by further relief that a “phase one” trade deal with China is done and clarity over the UK’s Brexit is coming into focus. Shares of Netflix (NFLX) and banks pushed upward Tuesday to keep the market’s winning streak alive. The broad indexes posted a +0.1% lift. Shares closed flat Wednesday, held back by a -10% slide in delivery firm FedEx (FDX) who cut its profit outlook. Stocks resumed their rally Thursday after semiconductor firm Micron (MU) said that business has bottomed-out after a tough global economic period. The S&P 500 added another +0.4%. A nice rise in household income and spending Friday offered further reassurance of a solid domestic economy. Stocks responded by pushing upward once more, closing with a +0.5% gain.
Another winning week on Wall Street with the S&P 500 (SPY) adding +1.57%. The Nasdaq 100 (QQQ) rose +2.18%. Small-cap stocks (IWM) gained +1.99%. It was nearly the 10th straight winning week for the S&P 500 and 12th consecutive week of positive action for the Nasdaq.
Warm wishes and until next week.