March 24, 2016

Stocks gapped down at the open, following on yesterday’s weakness. The Dow and SPX are currently down 52 pts & .37%, respectively. Financials, industrials and materials are the worst performing sectors. WTI crude oil is trading down under $39/barrel and most other commodities are also lower. Bonds are selling off a bit as well. The 5-year Treasury yield ticked up to 1.38% and the 10-year yield is up to 1.89%.

Jim Paulsen of Wells Capital Management says this market is neither a bull market nor bear market, but rather a “bunny” market. He points out that there is no clear positive or negative trend in stock prices. Rather, this market is hopping around but going nowhere. Why? The market is waiting for a catalyst to continue the drive higher. Mr. Paulsen thinks that catalyst will probably be better economic data in Europe or China. He predicts the S&P 500 Index will end the year flat. Finally, he reminds us that as our economy improves over the course of the year, continued improvement in labor markets will likely create some inflation pressure, and that will force the Federal Reserve to resume short-term interest rate hikes. So don’t expect stock market volatility to go away anytime soon.  

Durable goods orders (wholesale orders for manufactured products meant to last more than 3 years) fell 2.8% m/m in February after rising 4.2% in the prior month. The dip was slightly less severe than Wall Street economists had projected. We’ve seen a lot of volatility in this series lately. Orders excluding defense equipment & aircraft, often considered a good proxy for corporate capital spending, fell 1.8% in February after rising 3.1% in January. On a year-over-year basis, durable goods orders are up 1.8% but orders excluding defense equipment & aircraft are flat. Business investment is clearly one of the weak points of the economy. It has been held back by broad weakness in the energy and mining sectors. The only good news here is that the year-over-year rate of growth in orders is accelerating (now at a 1-year high). So the worst may be behind us. 

Markit Economics’ private estimate of US services business activity rose a bit to 51.0 this month from 49.7 in February. Remember, as with any PMI index, 50.0 is the dividing line between contraction and expansion. Recent improvement in the index is welcome, but note that February’s reading was the lowest in over 2 years, indicating contractionary business conditions. Service businesses account for most of our economy so the health of the service sector is watched closely.  According to Barron’s, weak results from this index point to sub-2% first quarter GDP. I’d point out that another popular service sector gauge—ISM Non-Manufacturing Index—was reported at 53.4 in February. So according to that index things are quite as dodgy.

Tomorrow we’ll get preliminary gross domestic product (GDP) figures, which measure economic growth. CNBC is telling investors not to rely on the numbers that will be reported. They have found evidence of “large and persistent errors,” in the government’s preliminary GDP calculations. In other words, whatever growth figure is reported, it will likely be revised by quite a bit in the coming months. In addition, CNBC says about 30% of the time, the government’s preliminary report of GDPdoesn’t even get the direction of growth (accelerating or decelerating) right.  


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