December 6, 2016

Stocks opened pretty flat this morning (Dow -7 pts; SPX +.1%). The telecom sector is up 1.2% in early trading and the semiconductors & banks are up about .5%. But most other groups aren’t moving much. The VIX Index is back down to 12 so the market is pretty complacent/calm. The dollar is up a bit today but has fallen over the last week or so. WTI crude oil is trading back down under $51/barrel. Bonds are roughly unchanged. The 5-year Treasury yield is hovering around 1.84% and the 10-year is trading at 2.39%. So not a very exciting day. 

We got some worker productivity and labor cost data this morning. Third quarter productivity grew 3.1%, which is the highest rate of growth since Q2 2015. Total worker output rose 3.6% and hours worked rose .5%. The report revealed wage pressure. Compensation rose 3.8% in the quarter and unit labor costs surged .7% from the prior quarter. And labor costs were revised upward for the prior (second) quarter as well. Economists say productivity growth is what drives the country’s standard of living. It also helps determine corporate profits. During this expansion productivity has been weak. In the past, productivity grew on average about 2.2% per year. But in the third quarter it was flat year-over-year, and that’s an improvement from the declines we saw in the prior three quarters. So we’re not back to normal but it’s getting better. And by the way, the wage pressure will likely encourage the Federal Reserve to resume interest rate hikes soon. 

Durable goods orders surged 4.6% in October following a 4.8% gain in the prior month. Bloomberg says the factory orders report “paints a picture of gradual improvement in manufacturing conditions, similar to other recent production sentiment gauges.” Civilian and defense aircraft helped drive growth in orders. However, economists’ preferred measure of US corporate capital spending—capital goods orders, non-defense, excluding aircraft—rose only .2% in the month. And on a year-over-year basis the data series is down 4.2%. So the news isn’t as positive as the headline would indicate.  

But make no mistake, the economy is improving. Citigroup’s US Economic Surprise Index is up to +28.7 at the moment, having come all the way from -55 last February. In fact, the chart has been improving since the middle of 2015. 

Jim Cramer on Friday spent some time urging his watchers to think more long-term about their investments. He noted buying stocks gradually in the middle of a stock market downturn is a good way to get long-term gains.  Warren Buffett isn’t fazed by downturns because he has an incredibly long time horizon. But that method can also produce short-term pain. “Don’t get me wrong, if you have a shorter time horizon—for example, if you’re a hedge fund manager who absolutely needs to be up for the year (or for the day for that matter) because investors will flee your business—then you cannot approach a bear market as a long-term buying opportunity.” 

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