Market Commentary: Popping the Cork

‘Tis the time of year when thoughts generally turn to mangers and lanterns, carols and cookies. In Washington, not much more than Christmas cards tend to move through Congress. But this time, lawmakers are voting on a $1.37 trillion spending package, a new North American trade deal, and two articles of impeachment against the President of the United States. On Main Street, folks are full of holiday spirit and it would take a lot more to divert attention from friends and family, travel and toasts. On Wall Street, traders are popping the cork a wee bit early, celebrating an apparent Phase One trade deal with China, economic data that has brushed away talk of recession, and a sparkling year for stocks and bonds.

This has been a December to remember and a year to cheer for equities. New records have been set and re-set again this month. On the year as a whole, the Dow has risen 21% from 23,327 to 28,235. The S&P 500 is up 27% from 2,506 to 3,191. And the Nasdaq has gained nearly 33% from 6,635 to 8,814. Volatility has declined by more half; the VIX has dropped from 25.42 to 12.14. In the commodity markets, oil prices are up 33% or $14.80 a barrel at this writing to $60.21, and gold prices have increased 15% to $1,475 an ounce. Unlike last year at this time, the Federal Reserve is not raising rates and tightening liquidity. The target federal funds rate was lowered by 75 basis points during the year, and the Fed has been buying $60 billion of Treasury bills a month and injecting as much as $75 billion a day into the banking system since September via repurchase agreement operations.

Bonds have had a wonderful life as well in 2019. Fixed income indices have returned about 6% this year, high yield even more. The 2-year Treasury yield is down 86 basis points to 1.62%, the 10-year has tumbled 81 basis points to 1.87% and the 30-year yield has fallen 73 basis points to 2.28%. The Baa corporate bond yield has plunged 170 basis points from 5.42% to 3.72%. Municipal bonds have also strengthened even as issuance climbed by about 20% from last year and taxable muni sales surged, primarily due to advance refundings. The 2-year AAA tax-exempt general obligation bond yield is down 73 basis points to 1.05%, the 10-year is 86 basis points lower at 1.42% and the 30-year benchmark has declined by 98 basis points to 2.04%. The 30-year AAA taxable muni yield has dropped from 3.96% to 3.13%. The difference between the 2-year and 30-year tax-exempt muni yields has narrowed from 124 basis points to 99 basis points as investors poured a total of $82 billion into municipal bond funds over 49 consecutive weeks and managers reached for yield on the long end. High yield muni bond funds have taken in $18 billion of new money this year.

Before the year comes to a close, we have a Democratic presidential debate, and data releases on inflation, spending, and home sales. We have concerns about unfunded pensions, healthcare costs, our federal deficit and debt, business debt at $15.987 trillion, and household debt at $15.986 trillion (48 million Americans are still paying off debt from last Christmas). But we end on a merry note, with unemployment at a 50-year low, inflation under 2%, an idle Fed, housing permits at a 12 year high, and homebuilder confidence the strongest it has been since 1999. We will be back in a few weeks to recap some highlights of 2019 and take a look at the trends carrying us into 2020. For now, we wish you and yours wonderful, happy holidays and a healthy and successful start to 2020.

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