U.S. Markets Diverge as Jobless Claims Spike

With the only real action in the IPO market, investors did little today to move the major indexes in a meaningful way. The DJIA and S&P 500 closed lower, while the Nasdaq climbed 0.5% behind shares of Twitter (TWTR) and Tesla (TSLA). Oil stocks got a boost from a rise in crude oil prices, which jumped 3% on the day. 

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Weekly unemployment claims spiked to a multi-month high as Americans filed 853,000 claims during the week ending Dec. 5, up 19% from the previous week’s 716,000 and exceeding estimates of around 730,000. That't the wrong direction — but lawmakers have apparently backed away from stimulus talks until next week. 

On the other hand, the Consumer Price Index increased by 0.2% in November after being unchanged in October, according to the Bureau of Labor Statistics. This was 10 percent higher than expected and represents a 1.2% increase year-over-year. Prices have started to rise, which won't feel the same for all consumers — especially those at lower income levels.

Credit Spreads are Tightening —Unlike 2009

Another key difference between the COVID-19 recession and the Great Financial Crisis is the scale of the government intervention this time around. It was big back then but nothing compared to the more than $3 trillion the U.S. government and Federal Reserve have pumped into financial markets, either directly or through government or corporate bond purchases. 

The result, besides avoiding a long and painful recession, is that credit spreads are tightening between government and corporate bonds. Put another way, there is not a lot of risk in the bond market because investors know Uncle Sam has laid out the safety net. 

So What?

A bond credit spread reflects the difference in yield between a treasury and corporate bond of the same maturity. Debt issued by the United States Treasury is used as the benchmark in the financial industry due to its risk-free status being backed by the full faith and credit of the U.S. government. U.S. Treasury (government-issued) bonds are considered to be the closest thing to a risk-free investment, as the probability of default is almost non-existent. Investors have the utmost confidence in getting repaid. 

If there is no risk in buying bonds, there isn't a lot of reward either. That's another reason why money has been flowing into stocks lately.

High-End Consumers are Doing Just Fine

Another economic report and another example of the K-shaped recovery in full effect. While consumer confidence has taken a dip recently, those making more than $100,000 per year have actually seen an improvement in the last month, while lower-income cohorts continue to struggle.