Covenant Weekly Market Synopsis as of December 16, 2016

December 19, 2016


The Fed threw a little sand in the gears of the post-election stock market rally last week. Although the 0.25% rate hike announced following their final meeting of the year was fully priced into the market, the Fed struck a modestly more hawkish tone that included an increase in their forecast for the number of rate increases in 2017 from two hikes to three. In response to the announcement equities fell by about 1%, the US Dollar jumped 2% and the Treasury yield curve shifted higher by about 0.1%. For the week, domestic equities closed marginally lower, while the stronger dollar negatively impacted emerging market stocks which declined by a little more than 2%. Amongst developed nations, European and Japanese stocks stood alone in positive territory gaining about 1%. It is worth noting that on a month to date basis, developed market equities are putting up another strong month of performance with gains of 2% – 3% or better.

Yields on US Treasuries ticked higher, particularly in the front-end of the curve (2-10 year maturities) while the spread on high yield bonds shrank to its lowest level of the year (3.56%) intraweek, before nudging higher to 3.64% (as measured by the Credit Suisse Barclays Index). Precious and industrial metals declined, while crude oil rose 0.9% to $51.98 per barrel.

For a detailed view of weekly, month-to-date and year-to-date asset class performance click here.


Red Tape: The chart below compares average annual GDP Growth against the amount of government red tape (represented by the number of pages in the Federal Register*) under each presidential administration since Harry Truman. Over the last 70 years and through 10 administrations the number of pages in the Federal Register has increased by more than 7x, while annual GDP growth has declined from an average of 4.7% (pre-1969) to 2.7% (post-1969). Is this spurious correlation, or proof positive that more government leads to reduced economic growth? Like most things in life, and especially in economics, the answer is not entirely clear.



Source: FTN Financial

The chart presents a very clear picture of declining economic growth in the midst of rising government regulation. Of course, economic growth cannot be tied to any single factor as it is influenced by myriad variables (demographics, global growth, monetary policy, etc.). Yet, we are about to witness a test of the hypothesis that smaller government equals more efficient capital distribution and higher economic growth. Aside from President-elect Trump’s own stated interest in reducing the number of laws on the books, he is assembling a cabinet that appears to be uniquely qualified to reduce Big Government:  Scott Pruitt (Environmental Protection Agency), Rick Perry (Department of Energy), Andrew Puzder (Department of Labor) and Tom Price (Health and Human Services) will be heading up organizations that they have publicly chastised as wasteful. Time will tell if Trump’s policies to reduce the role of government in business lead to a higher growth rate, but the chart above and academic research would indicate he is on the right path.


Trading Partners: “International trade” is a commonly used term in economics that measures the value of goods and services that various countries buy and sell with one another. Most people are likely familiar with the term, but the concept is somewhat abstract. Yet, international trade is an important aspect of global prosperity as it represents a significant share of Gross Domestic Product for most countries. To help convert an abstract concept to a more tangible one, data visualization expert Max Galka created an interactive map to illustrate how goods and services flow around the world. The map (available here), allows the user to zoom in/out, rotate the model, etc. to gain a better understanding of the current state of international trade, including the location of the largest trading hubs, areas of low international trade, and trading relationships between countries.




Here are a few points and hints on how to use the map, quoted directly from the website:

  • When looking at the globe as a whole, trade is concentrated into obvious hubs. The United States, Europe, and China/Japan are the most evident ones, and they are all lit up with color.
  • There are also obvious have-nots. Take a look at most of the countries in Africa, or click on an individual country like North Korea to see a lack of international trade.
  • In fact, North Korea is completely vacuous, except for one lonely dot floating to China every so often. After taking a quick look at the data, it seems China takes in over 60% of North Korea’s exports, which are mostly raw materials such as coal, iron ore, or pig iron.
  • Now click on South Korea, and the situation is completely different. By the way, South Korea exports $583 billion of goods per year, while the hermit nation does just $3.1 billion per year.
  • This map also shows how dependent some countries are on others for trade. Look at Canada, a country that sends close to 75% of its exports to the United States. Mexico has a similar situation, where it does most of its business with the U.S. as well.
  • This is a stark contrast to Cuba, which doesn’t trade enough with any one partner to have it visualized on this scale at all. Cuba has exports of only $1.7 billion, and its largest trading partner is China, which only takes in $311 million of goods per year.


Weekly Economic Data Summary: After a string of firmer data points, November economic activity reported last week had a more tepid tone in several categories as Retail Sales, Industrial Production, housing starts and building permits were all below expectations. The November Core Consumer Price Index (CPI) remained stable at 2.1% year-over-year. The Atlanta GDPNow forecast now indicates Q4 GDP growth of 2.6% (vs. 3.6% at the end of November), though this forecast moves around quite as data is updated throughout the quarter.

I hope you and your family have a holiday season, filled with cheer, joy, and memory making encounters. Happy New Year.



*The Federal Register is the main source for the U.S. federal government agencies: proposed new rules and regulations, final rules, changes to existing rules, notices of meetings and adjudicatory proceedings, and Presidential documents including executive orders, proclamations and administrative orders.