December 27, 2016

Stocks opened higher this morning and the Dow is again attempting to reach the 20,000 level. At the moment, the Dow and SPX are up 38 pts & .36%, respectively. Most sectors are modestly higher, led by tech and healthcare. Retailers are also faring well this morning. Telecoms and utilities are a bit lower in early trading. Exchange trade volume should be fairly light this week. Oil continues to rally, having risen about $10/barrel in the last six weeks. WTI crude is now trading at $53.60/barrel. Bloomberg says OPEC’s production cut will soon take effect. 

Bonds are a bit lower today as yields resume their march higher. The 5-year Treasury yield is hovering around 2.05% and the 10-year is trading at 2.57%. Both charts look very similar, suggesting this move in rates is affecting both short-term and long-term bonds. In other words, Fed rate hike expectations are rising in tandem with inflation expectations. 

The S&P Case-Shiller Home Price Index rose 5.6% in October from year-ago levels. That’s as expected. A subset of the 20 largest metro areas saw home prices rise 5.1%. home prices have been rising about 4.5% to 5.5% y/y for the last couple of years. Many analysts expect home price growth to slow next year due to higher mortgage rates. 

Separately, consumer confidence surged to 113.7 this month from an upwardly revised 109.4 in November. So confidence is now at its highest level since 2001. A subset of the index that measures consumer expectations for the next six months is back to a 13-year high. As Bloomberg puts it, “American households are expecting the Donald Trump administration to deliver.” 

And speaking of Mr. Trump, Citigroup’s famed equity strategist Tobias Levkovich raised his outlook for US corporate profits based on the expectation for corporate tax cuts. Mr. Levkovich now expects S&P 500 companies to post 9% profit growth next year. This is predicated on the effective tax rate falling to 20% from the current 27% level. He also expects Trump administration policies to boost US economic growth. 

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