October 5, 2016

Stocks opened higher this morning (Dow +123 pts; SPX +.5%). For three consecutive days interest rates are up and the defensive sectors (utilities, telecoms) are down; energy and financials are up. This morning, energy and financials are up about 1.5%. The VIX Index is back down under 13, suggesting some confidence in a smooth market over the next 30 days. WTI crude oil is up yet again, now trading very close to $50/barrel. Other commodities are higher as well, but gold has been in a gradual selloff for two months now. Bonds are selling off today. The 5- and 10-year Treasury yields are up to 1.26% (highest since June) and the 10-year Treasury yield is up to 1.72%. This has everything to do with traders building in Fed rate hike expectations. 

ISM’s non-manufacturing business index shot up to 57.1 in September vs. 51.4 in the prior month. That’s the highest rate of expansion for the services sector since October 2015, and represents such a big jump in in the index that I wonder about an anomaly. It could be that we need to average this reading with August’s exceptionally weak figure to get a more realistic picture of business activity. The average of the last three months of data is 54.7. And remember, any reading over 50.0 indicates expanding business activity. Digging into the details, the employment component of the report surged to 57.2 and the forward-looking new orders component jumped to 60.0. This report is mostly responsible for today’s stock market rally.

The National Retail Federation says this holiday shopping season will be better than last year’s. Holiday retail sales are forecast to increase by 3.6% y/y. Optimism is fed by rising incomes, rising home prices and a strong job market. Finally, the organization says there is no evidence that the election campaign is restraining consumer spending. By the way, RetailNext and Deloitte also forecast holiday sales up somewhere between 3% and 3.5%. And the online portion of holiday sales should be up anywhere from 7-19% y/y.

Eaton Vance portfolio manager Yana Barton has the quote of the day: “Invest in companies and stop calling the market.” Despite the lack of clarity on the election and economic growth, she reminds everyone that the market is grinding higher.  

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