- Dow edges up, S&P 500 just above flat, Nasdaq dips
- Materials lead S&P 500 sector gainers; comm svcs weakest group
- Dollar, gold slip; crude, bitcoin gain
- U.S. 10-Year Treasury yield rises to ~1.55%
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MUNIS EXPENSIVE, BUT STILL AN OPTION FOR TAXABLE ACCOUNTS (1334 EST/1834 GMT)
The municipal market has been a bright spot for fixed income investors in 2021. This according to LPL Financial Research.
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LPL notes that while most of the other “safe” parts of the core fixed income universe have generated negative returns this year, the national muni market is up for the year (through December 22).
Meanwhile, with state and local governments flush with cash from better-than-expected tax receipts along with generous amounts of federal aid, LPL believes many municipalities are in good shape.
“2021 has been a good year for munis and valuations reflect that good story,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “Continued positive inflows to the asset class along with the improved fundamental story for many state and local governments should provide a positive backdrop for returns next year.”
However, the effects of higher tax collections, strong federal support, and robust investor demand has had a positive impact on municipal bond valuations. As such, when looking at the ratio between AAA munis and similar-maturity Treasury yields, a common valuation metric, LPL says prices are elevated.
As LPL sees it, munis are expensive with 10-year AAA and 30-year AAA munis near the bottom decile of historical valuations, “meaning munis have been cheaper approximately 90% of the time.” Thus, LPL thinks investor expectations should likely be guided downward as outsized returns are, in their view, unlikely.
“As 2022 approaches, we continue to favor municipal bonds as a high-quality option for taxable accounts. Federal stimulus is providing support, although valuations relative to Treasuries remain elevated and demand may not get a boost from personal tax rate increases.”
USING SHORTS TO FIND EARLY WINNERS IN 2022 (1201 EST/1701 GMT)
While most investors holding big winners are likely to wait until after the start of the new year to sell in order to delay paying taxes, short sellers who have made money will wait until next year to cover their positions, giving investors an idea of stocks that may rally to start the year, according to Schaeffer’s Investment Research.
Senior quantitative analyst Rocky White looked at stocks over the past four years with short interest that was 10% above the float and their year-to-date return to isolate those which are highly shorted and also saw big price declines. Those stocks would likely have the best chance to move higher on a short covering rally early in the year.
The stocks that had fallen more than 10% saw the best returns the first week of the year in the years from 2018 through 2021.
White then narrowed that list using data from only the most recent year and found that while the most highly shorted names that were down more than 10% in price were not the best performing group among those that were either positive or down less than 10%, the average return still beat the returns of the SPY (SPY.P) and IShares Russell 2000 ETF (IWM.P) in the first week of the new year.
White then looked at stocks that were down at least 10% in 2021 with at least 10% of their float sold short to identify 25 that could rise due to early year short covering.
Below is White’s list of the top 25 short cover candidates for the start of 2022:
MIND THE GAP: PENDING HOME SALES RETREAT, TRADE DEFICIT HITS RECORD HIGH (1100 EST/1600 GMT)
Data released on Wednesday showed sky-rocketing home prices are weighing on the possibility of home ownership while the goods trade deficit – the chasm between imports and exports – yawned to its widest ever.
Signed contracts for the sales of pre-owned U.S. homes (USNCH=ECI) unexpectedly dropped by 2.2% last month, according to the National Association of Realtors (NAR). read more
The reading marked a reversal from October’s 7.5% surge and defied the 0.5% increase analysts expected.
Pending home sales, along with building permits and applications for loans to purchase homes, is among the sector’s most forward-looking indicators, and provides further evidence that the housing market is beginning to buckle under the weight of its own success.
The pandemic sent homebuyers scurrying to the suburbs in a mad grab for elbow room and home office space, sending available homes on the market to record lows. That, in turn, has launched home prices into the stratosphere, a phenomenon illustrated by yesterday’s Case-Shiller report.
This has resulted in evaporating affordability for many potential buyers, particularly at the low end of the market.
“Buyer competition alone is unrelenting, but home seekers have also had to contend with the negative impacts of supply chain disruptions and labor shortages this year,” says Lawrence Yun, chief economist at NAR. “These aspects, along with the exorbitant prices and a lack of available homes, have created a much tougher buying season.”
It should be noted, however, pending home sales data remains well above pre-pandemic levels, as illustrated by the graphic below:
Separately, the Commerce Department released its advance take on trade balance and wholesale inventories for November.
The report showed the gap between the value of merchandise imported from abroad versus domestic goods exported to U.S. trading partners (USGBAL=ECI) widened by nearly 18% to a record $97.78 billion, wiping out the narrowing of the deficit witnessed in October. read more
As the U.S. economic recovery from the global heath crisis outpaces much of the world, and with the dollar steadily gaining strength since September – which has made American-made goods more expensive – the trade deficit has weighed on GDP for the last five consecutive quarters.
“Looking ahead, we expect the trade deficit to remain historically elevated until pandemic worries ease,” writes Nancy Vanden Houten, lead U.S. economist at Oxford Economics. “Rising Covid cases abroad once again threaten to constrain global demand, risking an even wider deficit if export growth slows more than imports.”
“However, wider vaccine diffusion and dissipating supply constraints over the coming quarters should allow for more normal trade flows,” Houten adds.
For Reuters interactive graphic on the status of world vaccine deployment, click here.
On the other hand, in a positive sign for fourth-quarter economic growth, the value of goods stored in the warehouses of U.S. wholesalers (USAWIN=ECI) grew by 1.2%, marking a deceleration from the prior period’s 2.2% increase.
Private inventories, stunted by ongoing supply chain challenges, weighed on GDP in the first half of the year but contributed two percentage points last quarter to the 2.3% headline print.
Market participants appear to be sitting this one out, as Wall Street is contending with light volume, while struggling to find the plot.
The blue-chip Dow (.DJI) is setting a tentative course for its sixth consecutive gain. That said, communication services (.SPLRCL) names are weighing on the Nasdaq (.IXIC), while the S&P 500 (.SPX) hovers just above the flat line.
AMID TRICKLING VOLUME, U.S. STOCKS SUBDUED IN EARLY TRADE (1007 EST/1507 GMT)
Wall Street’s main indexes are little changed early Wednesday amid thin trading volumes, as caution kicked in after daily U.S. COVID-19 infections hit a record high.
Indeed, Monday and Tuesday of this week registered the two slowest volume days of 2021. And with total volume so far this week now just over 17 billion shares, the pace suggests this could potentially end up being the slowest weekly share turnover since the week ending February 21, 2020, when just 31.5 billion shares changed hands.
In any event, one mover today is the U.S. 10-Year Treasury yield . Earlier, the yield hit a three-week high at 1.5310%.
Here is where markets stand in early trade:
DOW INDUSTRIALS: SIX STRAIGHT OR SINK? (0900 EST/1400 GMT)
The Dow Jones Industrial Average (.DJI) has now risen five straight days. That’s its longest streak of higher daily closes since a seven-day run from March 5 to March 15 of this year.
That said, with CBT e-mini Dow Futures roughly flat in premarket trade, traders will have to wait to see on which side of the fence momentum will land.
On Tuesday, the blue-chip average flirted with its 36,432.22 Nov. 8 record close and its 36,565.73 Nov. 8 record intraday high. The DJI hit 36,527.26 before selling back to end at 36,398.21:
Since once again using the broken log-scale resistance line from 1929 as a launching pad in early December, and then the 200-day moving average (DMA) as support on December 20, a push to new highs can likely clear the way back up to the resistance line from early 2018, which now resides around 37,050.
This line remains an important barrier given that it capped strength in early November. Overwhelming it, however, would suggest potential for the 39,000 area in Q1 2022, if indeed, the S&P 500 (.SPX) more directly challenges its log-scale resistance line from 1929. Click here: read more
In any event, given the streak, and resistance at the Dow’s record highs, some pullback would not be a surprise. However, the rising 50-DMA, which ended Tuesday around 35,675, can look to contain weakness.
A DJI reversal below more significant support ranging from the 200-DMA, which ended Tuesday around 34,710, to the Dec. 1 trough at 34,006.98, however, will have the potential to signal a major trend change.
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Terence Gabriel is a Reuters market analyst. The views expressed are his own
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