So whether one was in New York, London (where I’ll be this week), or Davos, the overwhelming emotion of the week was definitely one of optimism. The stock market continues to rally, the economic news has been pleasant, and the United States government’s desire to commit political and economic hari-kari seems to have been minimized (at least for now).
The S&P 500 crossed the 1,500 level to reach its highest level since December 2007 at 1,502.96. The S&P is on its longest winning streak since November 2004. The Dow is now at its highest point since December 2007 at 13,895.98, and is less than two percent away from its all-time high of 14,164 reached back in October 2007. The NASDAQ is also up in the month of January but not back to its multi-year high of 3,196.93 reached back in September. The price drop of Apple stock has been a constraint on the NASDAQ.
It’s interesting to note that even with the US stock market at its recent highs, from a historical earnings yield perspective, stocks still look quite attractive. Currently the earnings yield spread between the S&P 500 and the UST 10-year note is approximately 475bps. Back in the summer of 2007 this spread, also known as the equity risk premium (ERP), was only 70bps, and back in March 2000 the ERP was actually -280 bps.
This was definitely a “risk-on” week, as money moved from safety to yield. The US 2-year note yield was up +2bps to 27bps; the 5-year note yield was up +8bps to 84bps; the 10-year note yield was up +9bps to 1.94%; and the 30-year bond yield was up +8bps to 3.12%.
Another source of fuel for the current stock rally may be bank deposits. Since expiration of the TAG program, in the week ending January 9th, $114.1 billion in deposits left the banking system, the fastest drop in deposits since 9/11. With the loss unlimited insurance, those deposits earning no-interest are even more unattractive.
The corporate bond market was active, but it couldn’t maintain last week’s record pace. With corporate bond yields falling to a record low this week of 3.526%, PNC led domestic issuers with their $1.75 billion three-tranche transaction comprised of $750 million of a 3-year note, $250 million of a three-year FRN, and $750 million of a 10-year note.
All eyes will be on the Fed this week as the first scheduled FOMC meeting occurs on Tuesday and Wednesday. The Market will be scouring the Fed’s comments, trying to divine when the Fed might remove the stimulus punchbowl.
Given the improvement in the most recent Jobless Claims reports (currently at a five-year low), the impact of Employment report scheduled for release this Friday may carry greater weight.
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