Over the weekend, discussions about market action centered around the ten-year Treasury bond finally going over 3 percent—the great "line in the sand" and what happened to stocks was...exactly nothing.
Stocks remained at new highs...the Volatility Index (VIX) is near the lows for the year...what happened to all those predictions that tapering would be a disaster?
There are a couple of explanations:
1) Right now the holiday trade is the only thing on peoples mind: this is where stocks always get the benefit of the doubt. Higher rates should weigh on stocks later in January once the Federal Reserve's taper comes into effect; and
2) the economy is slowly expanding and the markets may be able to handle slowly rising rates. Last week November home sales and durable goods were strong, while jobless claims came in lower than expected.
Higher rates, bulls have argued, are not a bad thing as long as it's for the right reasons: mainly return of growth. Sure, if the 10-year moves to 4 percent from 3 percent in the next month, that is going to be a problem for stocks. However, it won't unless there's a lot more growth.
Have higher rates impacted interest-rate sensitive sectors? The evidence, so far, is mixed. With the S&P 500 up 3.4 percent since December 17th (the taper was announced on December 18th), some interest-rate sectors are outperforming (home building), while others (Utilities, REITs) are lagging. Look at the movement since the Dec. 17 close:
Housing +7.6 percent
Telecom +3.3 percent
Utilities +1.3 percent
REITs +1.0 percent
If you think about it, 2013 was The Teflon Year for stocks: ALL the disaster predictions failed to materialize.
Think of all the reasons you had to sell in 2013: the fiscal cliff, sequester, taper, Syria, government shutdown, debt ceiling...and we are at highs. The only issue that caused stocks to pause mid-year was the potential for higher rates. Of course, central banks...from Japan to Europe to the U.S....were actively involved this year, and there is no doubt they helped stabilize global markets. The 'Central Bank Put' was very much in evidence.
Now, bulls argue, with a budget deal and the taper starting, we have greatly reduced macro risk for the next 2 to 3 months. True, we won't know the full effect of the taper for many months, but right now look at the action: the S&P 500 is up almost four percent in the last two weeks, and the small-cap Russell 2000, considered a good gauge of stock market risk, has outperformed almost every day since the taper was announced.
1) Japanese stocks are having their best year since 1972. The Nikkei ended the year on a high note, up 57 percent in 2013— the largest annual increase since a 92 percent surge in 1972. Nothing else in Asia even came close:
Taiwan +12 percent
Malaysia +11 percent
S. Korea +1 percent
China Shanghai -7.6 percent
One key point: inflows into Japanese mutual funds and exchange-traded funds this year was titanic, accounting for a very large percentage of total inflows into stock funds. European funds also had strong inflows. U.S.-centric stocks had only modest inflows.
2) European Central Bank (ECB) head Mario Draghi sees no need to cut rates further. "The crisis isn't over, but there are many encouraging signs," he told Der Spiegel magazine.
—By CNBC's Bob Pisani