November 23, 2016

The major stock market averages opened mixed this morning (Dow +32 pts; SPX -.14%) after hitting fresh all-time highs yesterday. The Russell 2000 Index, by the way, also hit a new high. Industrials and financials are up nicely but most other sectors are lower. Real estate and utilities sectors are down the most in early trading. And the gold miners continue to sink. Indicated market volatility (VIX Index) has fallen from 23 to 12 in the last 3 weeks. The VIX is up a bit this morning to trade around 12.8. The dollar continues to rise (now up about 3.5% this month) in the wake of the election and although gold is down 7% this month, most other commodities are holding in there. WTI crude is up a bit to trade around $48/barrel after the Iraqi prime minster said his country is willing to abide by an OPEC production cut. Bonds are selling off again today. The 5- -year Treasury yield is up to 1.85% (matching a 5-year high) and the 10-year is trading at 2.39%.  

Now that the Dow has reached 19,000, Wharton Professor Jeremy Siegel notes that Dow 20,000 is only about 5% away. He believes this rally is “100% Trump.” Current challenges include rising interest rates and a strengthening dollar. But growth expectations are rising as well. Mr. Siegel believes a Trump corporate tax cut could drive S&P 500 earnings growth 10% higher. 

US durable goods orders surged 4.8% in October following an upwardly revised .4% gain in the prior month. On a year-over-year basis, orders climbed 2.1% vs. economists’ consensus forecast for a 1.6% gain. October saw a surge in aircraft orders—both civilian and defense related. But even excluding transportation and defense categories, “core” capital goods orders rose .4% in the month. This is an encouraging sign that businesses might actually be investing in growth again.  

New home sales dipped 1.9% last month to an annualized rate of 563,000 units. Last summer, the rate of new home sales hit a post-recession peak but have moderated a bit since then. The supply of new homes on the market climbed to 5.2 months (at current sales volumes) and that’s the most in seven years. The median new home price is up nearly 2% y/y to $304,500. Realtors are concerned that a spike in mortgage rates might slow home purchases. Last week the average 30-year fixed mortgage rate climbed to 3.9%. 

Citigroup’s US Economic Surprise Index is back in positive territory, and that means economic growth is improving. The index began the year by plunging to -55 in the middle of a market correction and drop-off in exports, business investment and global trade. It recovered quickly but was again knocked lower in the aftermath of Brexit. Economic data (i.e. retail sales, existing home sales, ISM Manufacturing Index) began to improve in late October and just last week the Economic Surprise Index popped back above zero. So it looks like Mr. Trump’s election victory coincided with an upturn in the economy.  

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