November 16, 2016

The major stock market averages opened lower this morning (Dow -60 pts; SPX -.25%). The financials sector is giving back some of its outperformance from the past week. Interest rate sensitive sectors like utilities and real estate continue to fall. On the other hand, tech and consumer discretion are higher in early trading. The dollar is stronger on the day, and is about 2.5% higher since the election. WTI crude oil was down but turned around (now $46.10/barrel) after the Russian oil minister said he expects some kind of OPEC deal to limit oil production. Gold is down 4% this month, a casualty of the stronger dollar. Bonds continue to sell off as yields spike. The 5- and 10-year Treasury yields are up to 1.70% and 2.25%, respectively. But even though we’ve seen a massive updraft in rates this month, we’re only back to year-end 2015 levels. 

Analysts at Bank of America/Merrill Lynch say investor sentiment has taken a turn for the better. Cash allocations have dropped and money is flowing into the stock market. Equity exchange-traded funds (ETFs) have seen billions of dollars of inflows this month. Whereas before the election investors were constantly fretting about weak economic growth and even deflation, all of the sudden rising inflation is a concern. You can see it in a steepening yield curve, a trend that is expected to continue. Donald Trump’s election victory is seen as clearly positive for growth. Morgan Stanley analyst Jim Caron was interviewed on CNBC this morning. He noted that “suddenly, almost overnight” we’ve shifted the economic narrative from stagnation to growth. Obviously, the market needs to adjust to accommodate the new view. We also have to “re-calculate” where interest rates need to be. 

Economic data is improving a bit. Yesterday, we learned that US retail sales surprised to the upside. On a year-over-year basis, sales jumped 4.3% in October following an upwardly revised 3.2% gain in September. That’s the highest year-over-year growth in retail sales since November 2014. Sales of autos and building materials were especially strong, but gains were widespread.  

Wholesale price inflation (Producer Price Index) edged a bit higher, rising .8% y/y in October. That’s the highest reading since December 2014, and should be viewed as a modest positive since Wall Street has been worried about deflation, not inflation.  Excluding the more volatile food & energy categories, PPI held steady at 1.2% y/y growth. Wholesale inflation remains very tame. 

Industrial production fell flat in October following a -.2% drop in the prior month. But Barron’s says the “headline isn’t as bad as it looks…” That’s because the recent weakness is driven by utilities output and mining production—not manufacturing. Output of manufactured goods is up for the second straight month. Auto production rose 5% y/y and high-tech components production is up 6.7% y/y. Even more important, business equipment is finally improving. 

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