The Daily Prophet: The Everything-Is-Awesome Rally Gains Steam

Connecting the dots in global markets.

The naysayers warning that investors pushing stocks to new heights are too complacent were nowhere to be found on Tuesday, as equities set fresh records on good news all around. Not even President Donald Trump tweeting that a U.S. government shutdown next month may be unavoidable or reports of North Korea launching another ballistic missile could keep the S&P 500 Index from posting one of its best days of the year, the Bloomberg Dollar Spot Index from appreciating for a second straight day and junk bonds from strengthening.

Instead, investors took their cue from what appears to be steady progress on tax reform in Washington, soaring consumer confidence and some market-friendly comments by Federal Reserve Chair nominee Jerome Powell in his Senate confirmation hearing. The good news started before most investors even got out of bed, as the Paris-based Organization for Economic Cooperation and Development predicted the global economy will expand 3.7 percent in 2018, which would be its best performance in years. Then, the Conference Board's U.S. consumer confidence index unexpectedly improved in November to a new 17-year high. Powell's comment that financial rules are “tough enough” only added to the good vibes. What was there not to like? 

That's not to say there weren't some scraps for the bears to feed on. In making its prediction for growth in 2018, the OECD also said asset prices have gotten too high for a global economy that is set to peak next year. Also, Bloomberg News' Steve Matthews reports that a survey of economists by the University of Chicago’s Booth School of Business -- a poll that includes Republicans, Democrats and independents -- found just one of 38 respondents agreed that, a decade from now, GDP would be substantially higher from tax cuts than under the status quo; 39 percent were uncertain and 58 percent disagreed.

As well as U.S. stocks have done this year, emerging-market shares have done even better. And investors who correctly made bullish calls on the equities amid this year’s monster rally say there's no reason to pull out now. Wagering that economic growth will continue to propel gains in 2018 even though the MSCI EM Index has jumped 33 percent this year already, money managers and strategists from firms including Goldman Sachs, Ashmore Group, JPMorgan and BNP Paribas Asset Management say valuations are at reasonable levels, according to Bloomberg News' Aline Oyamada. In essence, they are betting that forecasts for a second year of economic expansion near 5 percent should continue boost earnings. "The strong move will continue, as the improvement cycle is just beginning,” Edward Evans, a money manager at Ashmore who helps oversee almost $59 billion, told Bloomberg News. His main overweight positions are in China, where he favors banks and e-commerce companies, and in Brazil, where he likes energy and materials producers. Evans says another double-digit gain in share prices on average can be expected in 2018. The price-to-forecast-earnings ratio has climbed to 14.1 from 13.5 at the start of the year, above the 11.6 historical average, Oyamada reports.

The bad news is that municipal bond prices have slid over the last three weeks. The good news is they are now the cheapest relative to U.S. Treasuries since March. The rout was triggered by a rush to borrow before Congress enacts sweeping changes that would pull subsidies from a major chunk of the tax-exempt bond market starting in January, according to Bloomberg News' Martin Braun. The resulting volume of planned sales jumped to a 13-month high of $24 billion. Consequently, the yield on 30-year tax-exempt debt has jumped to about 103 percent of yields on Treasuries. So-called munis typically yield less than Treasuries because of their tax-exempt status. The story for 2017 in the muni market has been skewed toward higher demand rather than more supply, as persistent net negative supply caused a headwind for munis relative to Treasuries, according to the strategists at Bloomberg Intelligence. While visible supply is building, the actual level of bond sales that may hit the market could easily double that amount, based on a historical relationship between actual and visible supply, the BI strategists note.

The shares of home construction companies are on a tear, with the S&P Homebuilding Select Index rising 26.8 percent this year versus 17.3 percent for the S&P 500 Index. LGI Homes, NVR and DR Horton are among the index's biggest gainers. Thanks to the lowest unemployment rate since 2001, rising consumer confidence and scarce inventory, housing prices have taken off. S&P CoreLogic Case-Shiller data released Tuesday showed that home prices in 20 major U.S. cities rose in September by the most since July 2014, or 6.2 percent from a year earlier. Rising property values are also helping to boost home equity and support consumer spending, the biggest part of the economy, according to Bloomberg News' Shobhana Chandra. There is one issue, though, that could cause problems down the road: Housing affordability for first-time buyers dropped in the third quarter to the lowest since late 2008 as the appreciation in home prices outstripped gains in wages, according to a National Association of Realtors report Tuesday.

The big news in the currency market Tuesday was that traders may finally be getting some clarity on the future of the U.K. pound. Sterling abruptly reversed its losses and the Bloomberg Pound Index rose the most in three weeks on a report by the Telegraph that U.K. and European negotiators have reached a deal on the financial settlement that Britain will pay when it leaves the European Union, clearing one major obstacle in talks. The two sides have reached an agreement in principle, the paper said, citing people it didn’t identify on both sides of the talks. The figure, left vague on purpose, will be 45 billion euros to 55 billion euros ($53 billion to $65 billion), the Telegraph reported. U.K. Prime Minister Theresa May and European Commission President Jean-Claude Juncker meet Dec. 4 for a lunch that’s tipped as the setting for an agreement on the divorce issues to be sealed, according to Bloomberg News' Emma Ross-Thomas. That would allow leaders at a summit in mid-December to declare that “sufficient progress” over separation terms has been made so that talks can start on the future relationship between Britain and its biggest trading partner.

The U.S. Commerce Department will provide its second estimate of how fast the economy grew last quarter when it releases its report on gross domestic product on Wednesday. The consensus is that GDP expanded faster than originally forecast, or 3.2 percent on an annualized basis versus the 3 percent pace originally reported on Oct. 27. If true, that would be the most since the economy expanded by the same amount in the first quarter of 2015. The economists at Bloomberg Intelligence say an upward revision is likely due to consumer spending and inventory accumulation. In addition to revisions, the report will also contain the first look of economy-wide corporate profits for the quarter. Earnings, the BI economists note, have been accelerating, so that part of the report should provide more encouragement to the bulls.


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