March 16, 2016

Stocks opened lower this morning but quickly turned around. The Dow and SPX are current up 8 pts & .1%, respectively. Energy, tech and financials are bouncing back, but the healthcare sector continues to languish. In fact, healthcare is the worst performing sector year-to-date despite the fact that earnings season confirmed solid revenue & earnings growth, which exceeded Wall Street expectations. Much of the recent weakness can be attributed to the presidential campaign. Politicians are eager to deride pharmaceutical and biotech companies and are calling for drug price cuts. 

Oil prices are up 4% on the day, allowing stocks to advance. WTI crude oil is trading back up toward $38/barrel. Most other commodities are up as well. Gold, by the way, is up about 15% year-to-date. But that’s small consolation for investors who have suffered a more than 30% decline since gold peaked in 2011. The dollar is stronger today, even though oil is higher. That’s because we’re facing a Federal Reserve policy meeting, and traders are wondering if recent improvement in the economy may lead the Fed to talk about interest rate hikes later this year. That’s also why we’re seeing bond yields rise. The 2-year Treasury yield backed up to 1.0% this morning for the first time since early January; the 5-year is up to 1.53%.

In a CNBC interview yesterday, hedge fund manager Lee Cooperman said he has a “neutral plus stance” on the stock market. I think that can roughly be translated to cautiously optimistic. Most investors, on the other hand, are taking a “very conservative stance” and the market is “discounting a more conservative set of assumptions” in terms of earnings & economic growth. So very few are expecting a “rosy scenario.” Consequently, many stocks now yield more than bonds; there are a “ton of stocks that are very cheap.” He also noted that bull markets usually end with a hostile Federal Reserve, and that just isn’t reality today. So neither the behavior of investors nor the actions of the Fed suggests a market top.  

US housing starts—ground-breaking on new construction—rose a better than expected 5.2% m/m in February to an annualized rate of nearly 1.18 million units. That’s pretty close to an 8-year high. That figure is also fairly close to the level of new construction necessary to keep up with natural population growth. It’s nowhere close to the excess we saw in the run-up to the housing crisis. 

The Consumer Price Index (CPI) rose 1.0% year-over-year in February, slightly ahead of expectations. Inflation decelerated a bit from January’s 1.4% growth. Excluding food & energy, “core” CPI accelerated to 2.3%, and that’s what traders are focused on this morning. Core CPI hasn’t increased this much since May 2012. Price increases were noted in medical care, rent, hotel rates and education. Remember, the Federal Reserve’s core inflation target is 2.0%. Yes, it’s true that the Fed’s preferred measure of inflation is slightly different (the Core PCE Deflator). But at this point, any sign of accelerating inflation will rile traders and cause volatility. 

US industrial production fell about 1% y/y in February. (I won’t even mention the month-over-month numbers because they’re very noisy.) That doesn’t sound inspiring. But Barron’s points out that weakness was driven by mining, and actually February’s figures point to a nascent reacceleration in manufacturing. To be specific, production of business equipment showed strength for the second straight month, and that could be a leading indicator for improving capital spending by companies. Similarly, while overall capacity utilization fell to 76.7% from 77.1% in the prior month, deterioration was driven by utilities producers and mining facilities. Utilization at manufacturing plants held steady at 76.1%.  


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