▪ The equity rally faded as investors began focusing on rising bond yields and the climbing U.S. dollar.
▪ The political backdrop still appears to promote economic growth, but investors are focusing more on specific policies.
▪ Equity leadership has shifted noticeably as markets become more dynamic.
U.S. equities finished mostly lower last week, with the S&P 500 Index down 0.9%.1 Rising interest rates and the climbing U.S. dollar weighed on sentiment, and investors started turning from broad hopes of fiscal stimulus and tax reform to wondering about specifics. And oil prices rallied strongly due to OPEC’s agreement to enact production cuts.
Weekly Top Themes
1. The November payrolls report confirmed that the job market is healing. The numbers were broadly in line with expectations. The unemployment rate fell more than expected to 4.6%, mainly due to a drop in the participation rate.2 Average hourly earnings fell for the first time since last December by 0.1% following a strong 0.4% gain in October.2
2. The manufacturing sector is gaining momentum, as previous headwinds such as lower oil prices have faded. The Institute for Supply Management Manufacturing Survey came in ahead of expectations, while the Output Index reached its highest level in 20 months.3
3. Consumer and business confidence have advanced since the election. This has boosted short-term U.S. economic activity. However, the potential downside includes an increase in mortgage rates and upward pressure on the dollar. Additionally, the political backdrop could cause a jolt to confidence levels if attention turns back to anti-globalization efforts.
4. Treasury yields should experience ongoing upward pressure, but the pace is likely to slow. We expect yields will rise unevenly over the next few years as the economy continues to accelerate and as inflation moves higher, but market action should be more orderly than recent activity.
5. Corporate earnings-per-share growth is accelerating. In November, 6 of the 11 S&P 500 sectors showed upward EPS revisions.4 The overall percentage of upward revisions was 60%, the highest level in several years.4