U.S. stocks generally continued to climb last week on more positive economic data.
The Dow Jones Industrial Average rose 0.73% to close the week at 17,958, the S&P 500 Index was up 0.39% to 2,075, while the Nasdaq Composite Index slipped 0.23% to 4,780. Meanwhile, the yield on the 10-year Treasury rose from 2.19% to 2.30%, as its price correspondingly fell.
The U.S. economy continues to exhibit strong momentum, although the same cannot be said for other parts of the world. Looking ahead, investors should expect significant divergences within the global economy.
That theme is having, and will continue to have, important implications for financial markets. Among the most notable implications: a stronger dollar, wariness around short-term U.S. bonds, and a preference for U.S. cyclical stocks and emerging markets in Asia.
Impact on short-term bonds and cyclical stocks
Last week’s economic data supported the consensus view that the U.S. economy will continue to outpace most other parts of the developed world. November readings on both the ISM Manufacturing and Services indexes were well ahead of expectations. While initial holiday sales figures were disappointing, showing an 11% drop from last year, this was probably more a function of changing consumer habits (in an age of online shopping, lining up at 3 a.m. on a cold November morning may be losing some of its appeal) rather than a sign of weakness.
Most importantly, November’s employment report released on Friday saw new jobs surge by 321,000, the largest single monthly increase since 2012. The three-month moving average is now at nearly 280,000, close to double the level from earlier this year.
Not surprisingly, the steady stream of numbers showing consistent growth is having an impact on the performance of different segments of the market. Within fixed income, short-term bonds are starting to come under renewed pressure. Last week, the yield on the two-year U.S. Treasury rose to over 0.60%, the highest level since the spring of 2011.
In equities, stronger growth is starting to translate into better relative performance for more cyclical stocks.
Over the past month, the Dow Jones Transportation Index – also a big beneficiary of lower oil prices – has gained almost 4%, while the Philadelphia Semiconductor Index is up around 8%. At the same time, defensive sectors are starting to trail the broader market, with the Dow Jones Utility Index down nearly 2% over the same timeframe. We would expect this trend to continue in 2015.