Market Commentary - February 16th, 2018
Volatility fell 33% last week and high yield spreads rallied as well. Despite experiencing the second largest weekly outflows on record, the high yield trough to peak move in spreads of 59bps pales in comparison to prior corrections during this bull market. The European debt crisis in 2010, the US budget crisis in 2011, and the energy bear of 2016 saw high yield bond spread widen 163, 400, and 310 bps respectively.
The median correction since WWII was -14.8%. It last Thursday was the low, it would tie for the second smallest post WWII correction of -10.2%. The median length from peak to correction territory is 153 days -2018 correction took 13 days. Since 1950's we've seen six corrections (>-10%) within a ten-day span. This type of event is a 4 standard deviation type move and rarely happens outside of a recessionary period.
The U.S. economy will see significant fiscal stimulus over the next two years - over 2% of GDP from the budget deal alone. In a hello Keynesian, good night Tea Party moment, DC has blessed deficits of $1.7t on the budget and $1.5t on the tax cut.
The bond market took the CPI data relatively in stride, suggesting yields had priced in the upside inflation surprise in the days leading up to the release. We in the home stretch of earnings season. Companies are beating earnings estimates at a 70% clip (80% for S&P 500!) which is in the top four on record and best mark since 2006. Revenue beat rate is 73% which is also top four and best since 2004. Guidance remains very positive.
U.S. oil production exceeded 10 million barrels per day, on pace to challenge Russia as the top global producer. U.S. shale activity saw its biggest two-week increase in three years, which will translate to a surge in production later this fall. The string of U.S. weekly inventory drawdowns may have run its course.
Core and headline CPI revealed strength, up 2.1% and 1.8% respectively. Six of the 10 components that make up the small-business optimism index increased in January, producing one of the strongest readings in the 45-year history of the survey. The reading of 106.9 was ahead of expectations and well above the 96.6 average since 2000. This may bode well for continued wage growth looking forward.
After finishing December strong, January housing starts surged to the second highest rate of the expansion of 1.326mm. January retail sales came in soft at -0.3% and December was revised downward by -0.4% to 0%. January was the largest m/m decline since last February and biggest miss versus expectations since 2015. The December revision turned a decent holiday season back toward mediocre and may translate to a muted 4Q GDP result.
Total consumer debt in 4Q17 rose $193b to a new all-time high of $13.15t - a fifth straight year of increases. Important note is this number is not adjusted for inflation or population. This is 67% of GDP, well below the 87% peak in 2009.
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