April 19, 2016

The major stock market averages continued their rally this morning (Dow +50 pts; SPX +.27%). Energy and materials sectors are leading way (+1.5%), whereas utilities and tech are lagging. The dollar is weaker today and commodities are mostly higher. Copper is up 1.9%, iron ore +5%, and WTI crude is up over $41/barrel. Europe is poised to close up 1-2%. Bonds are selling off, with the 5-year Treasury yield jumping to 1.26% and the 10-year back up to 1.8%.

The SPX is now up about 3% for the year, having completely recovered from the first quarter correction. The Dow is up about 3.6%. The Nasdaq, on the other hand, is still down year-to-date.

US housing starts fell almost 9% m/m to an annualized rate of 1.09 million units in March. February starts were revised up to 1.19 million. Building permits also fell about 8% to an annualized rate of 1.08 million permits. Throughout the period 2011 – 2014 we saw fairly consistent improvement in housing starts. And then about a year ago starts plateaued and have been range-bound since. This bears watching as we head into the crucial spring selling season for new homes. By the way, in order to keep up with natural population growth, we need to build about 1.1 million homes per year.

Johnson & Johnson (JNJ) reported better than expected first quarter earnings and also raised full-year 2016 earnings guidance. Revenue increased 1% from year-ago levels, and would have been about 3 percentage points higher if not for currency impact (i.e. stronger dollar). Earnings were 7.7% higher than year-ago levels. US pharmaceuticals sales jumped nearly 13% but medical device sales were down about 2.4%. Management now expects 2016 revenue to grow 2.2% over 2015 levels.  The stock is up 2% this morning.

Zacks Investment Research laid out the bull and bear cases for this market, and I thought I’d pass it along. Bulls are holding onto the fact that key parts of the domestic economy are very healthy (i.e. job market, housing, consumer balance sheets). So it’s likely that the recent soft patch in GDP growth will end soon. “There is enough underlying momentum in the economy to sustain ‘muddle-through’ growth and keep recessionary fears at bay.” In addition, the Federal Reserve will continue to be patient with interest rate hikes. Bears, on the other hand, cite low (or negative) corporate earnings growth and global economic growth concerns as top reasons why the market rally can’t continue. They say that the earnings cycle looks to be over. Overseas, key economies are depending too heavily on central bank stimulus to prop up growth—or just avoid deflation. 

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