The Daily Prophet: There's a Bull Market in Stock Superlatives

Connecting the dots in global markets.

It's seems that almost every day someone comes up with a new way to describe and understand the rally in stocks as the S&P 500 Index reaches new highs. After all, it has gotten a bit stale calling this 8 ½ year bull market the second-longest ever, trailing only the 1990-2000 run during the dot-com era.  

So, here's a new one: Thursday brought the eighth straight gain in the benchmark, its longest winning streak since 2013. Let's not stop there. The S&P 500 is on track for its ninth consecutive winning year, tying the record from 1991 through 1999. It's been more than a year since the S&P 500 fell as much as 5 percent from a previous high, the fifth-longest period without such a correction, according to Pension Partners' director of research Charlie Bilello. The Chicago Board Options Exchange Volatility Index, better known as the VIX, has closed below 10 for the seventh straight day, already making this the least volatile October in the history of the so-called fear gauge.   

The bears will say that just proves stocks are overextended and overdue due for a severe pullback. Putting aside the fact that it generally take a recession to turn a bull market into a bear market, consider that this latest leg higher in equities is actually built on some pretty strong fundamentals. Corporate earnings in the U.S. posted the first back-to-back double-digit quarterly advance in six years. That has kept price-to-earnings ratios stable amid the rally. The Citi Economic Surprise Index -- which measures data that exceed forecasts relative to those that miss -- has finally turned positive this month, after being negative for most of May, June, July, August and September.

The dollar's rebound from its weakest levels since early 2015 is looking more sustainable. After falling as much as 10.4 percent this year to its low on Sept. 8, the Bloomberg Dollar Spot Index has rallied 3.07 percent to its highest since July. It rose 0.57 percent just on Thursday alone for its biggest gain since January. Like stocks, the dollar is benefiting from stronger economic data and the prospect for corporate tax cuts that make interest-rate increases from the Federal Reserve more likely. Also aiding the greenback are political troubles in the U.K., which are causing the pound to tumble again, and in Spain, which are weighing on the euro. At this point, betting against the U.S. currency means you're betting against history: The Bloomberg Dollar Spot Index has risen in the fourth quarter for six straight years, according to Bloomberg News' Katherine Greifeld. “We’re now in an environment where the market is flirting with the idea of fiscal stimulus and tighter monetary policy, happening in the context of the Fed, which is likely to move in December,” said Alan Ruskin, global co-head of foreign-exchange research at Deutsche Bank. “There’s plenty pointing towards a squeeze in short dollar positioning.”

One big part of the fixed-income market is benefiting from a stronger outlook for the economy and earnings right alongside stocks. Just this week, yields on investment-grade corporate bonds fell to within 1.04 percentage points of Treasuries, as measured by the Bank of America Merrill Lynch US Corporate Index. That spread is the narrowest since 2007, and down from more than 2 percentage points in 2016. Recall that spreads gapped out to more than 6 percentage points in late 2008 at the height of the financial crisis. The Moody's Liquidity-Stress Indicator, which measures the ability of companies to meet their debt payments, fell to 3 percent in September, down from a recent peak of 10.3 percent in March 2016 and just above the all-time low of 2.8 percent. S&P sees the corporate default rate falling to 3.3 percent by March, lower than the long-term average of 4.3 percent and well below the 5 percent rate in 2016.


What a difference a day makes. On Wednesday, investors couldn't get out of Spanish financial assets fast enough, as Catalonia’s separatists said nothing would stop their drive toward an independent state. Well, apparently there is one thing that could stop them: division among the leaders of the separatists. Bloomberg News reports that some on the Catalan side want to create more time for a negotiated settlement with Madrid, while the leader of the most powerful group among the separatists promised that it's still full speed ahead. Diminished prospects for an imminent declaration of independence from Catalonia sent the Ibex 35 Index of equities surging 2.51 percent in its biggest gain since April. The yield on the nation’s 10-year bonds fell seven basis points to 1.69 percent, as investors snapped up a combined 4.5 billion euros ($5.3 billion) of bonds at a government auction. Most of those sold were five-year notes, which attracted 2.12 euros of bids for every 1 euro offered, above the 1.88 seen at the previous sale of that maturity on Sept. 7.

Gold is seen as one of those haven assets that investors run to in times of turmoil, and there's plenty of turmoil worldwide this year. But for some reason, it seems that very few people are interested in actually holding physical gold. Bloomberg News' Luzi Ann Javier reports that sales of gold coins in the first nine months of the year shrank to the lowest in a decade based on U.S. Mint data. The metal’s appeal is waning, as retail investors seek better returns in equities, lured by the S&P 500 Index’s climb to records, according to Peter Thomas, a senior vice president at Zaner Group LLC in Chicago. Bullion has slumped more than 6 percent since trading at the highest in a year in early September amid increasing odds that the Federal Reserve will hike interest rates by year-end. JPMorgan analysts recommended staying short on December gold futures and “continue to caution against holding gold as a political hedge during the global rate normalization cycle.”

There's little doubt that Friday's monthly U.S. jobs report will be skewed by impact of Hurricanes Harvey and Irma. The median estimate, or rather guesstimate, of economists surveyed by Bloomberg is for a gain of 80,000 jobs in September, down from the 156,000 recorded in August. That's doesn’t mean the report should be dismissed. No matter what happens, markets could be volatile given that no one really knows what to expect. One thing the fixed-income strategists at BMO Capital Markets found from a survey of clients is that bond investors are almost twice as likely to step in and buy if U.S. Treasuries weaken on the data than they are to sell if the market rallies. When pondering that, consider that the so-called whisper number is for an increase of 125,000 jobs.

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