What happened last week
- Risk sentiment increased last week, lifting the S&P 500 through key technical levels as Treasury yields plummeted.
- Bullish price action was kicked off by the Treasury’s quarterly refunding announcement, which took the pressure off of longer-term interest rates.
- The Fed meeting was unsurprising as a healthy but marginally weaker (but not weak) payrolls print augmented the rally in Treasuries.
What we’re watching this week
- We are monitoring the price action across equities and fixed income for signs of perseverance in recent trends.
- Treasury auctions could support or negate the positive reaction to last week’s quarterly refunding announcement.
- It will be a very light week of US economic data; internationally, updates on corporate sentiment in addition to growth and inflation data.
Horizon’s Investment Management Views
On average, going back 30 years, the last calendar quarter has yielded a 5% rally in the S&P 500 – but Santa may be a bit early this year. Stocks soared last week, slicing through key technical levels to gain just shy of 6% on the week, the S&P 500’s best since last November. As stocks tore through key technical levels, systematic investors, like trend-followers and short-term momentum algorithms, could flip from bearish to bullish – systematic flow to equities could support equities into the holidays. Small caps, high beta, and highly shorted sectors led the rally. However, some YTD mega-cap winners also posted substantial gains as a sharply lower dollar drove outperformance across European and Japanese equities.
As we had hoped last week, the Treasury quarterly refunding announcement allowed investors to put bond woes behind them; supply fears were assuaged by lower-than-expected guidance for long-term paper issuance. 10-year and 30-year Treasury yields fell by roughly 40bps from their intra-week highs. The Fed’s November policy meeting was a non-event, as expected; however, Friday’s jobs report, while still good, was notable in that the jobless rate ticked up to 3.9% on a smaller than expected job gains in October added and downward revisions to prior payrolls prints.
Looking ahead to this week, we are parsing the price action to see if recent trends across equities and fixed income are likely to continue into year-end. Major Treasury auctions this week could support or reject the markets’ conclusions drawn last week; significant tails (yield post-auction higher than pre-auction) in longer-term Treasury paper may reignite the Treasury sell-off, which would not bode well for equities. US economic data is light this week, with some “soft” data on the housing market and consumer sentiment. Outside the US, we will get updates from Europe on inflation, growth, and corporate sentiment throughout the week.
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