April 22, 2016

Stocks gapped down at the open as oil prices dipped. The Dow and SPX are currently down 43 pts & .16%, respectively. Earnings announcements are also driving sector & industry returns. Consumer staples, telecom and utilities stocks are leading to the downside. Financials are also taking a breather after having rallied 12% in the last 2 months. Consumer discretionary and healthcare sectors are up nicely in early trading. Most of Europe closed down today after European Central Bank chief Mario Draghi said interest rates will remain very low for an extended time. It will take time for monetary stimulus to work. WTI crude oil fell to $43.50/barrel after surging yesterday to a 4 ½ month high. So oil prices are up about 60% since bottoming on February 11th. Copper is up about 14% in the same period, suggesting global economic growth is looking a bit better. Bonds are selling off again today (5-year Treasury yield back up to 1.34%), and it looks like yields want to head higher yet.

In a CNBC interview yesterday, Jim Paulsen of Wells Capital Management said he sees “broadening evidence there is a pick-up around the globe, economically,” and that is the “real under-toe of this rally…” He believes the SPX will go to 2200 in the near term, roughly 4.5% higher than today’s level. Longer term, he thinks the recovery will last another several years, with annual returns on the low side (maybe 5%). Rates will begin rising soon.

Travelers (TRV) reported first quarter revenue in line with expectations, but earnings came up short due to one-time losses on weather events. Pre-tax catastrophe losses doubled to $318mil from $162mil in the year-ago quarter. Here’s the good news: insurance policy sales grew 4.6% to $6.17bil in the quarter. The company increased policy renewal prices by 2.2%, following a 3.7% increase in the year-ago quarter. And the bad news: investment income—about 60% of total earnings—fell 8% due to very low interest rates and poor returns on hedge fund investments. The stock is down 4% this morning.

The Index of Leading Economic Indicators (LEI) rose .2% in March from prior month levels. This is a bit of a disappointment in that 1) economists were expecting a .4% gain, and 2) February LEI was revised down to a .1% decline. Disappointing building permit volumes dragged the index down. I prefer to step back and look at the year-over-year growth in LEI, which is 2.2%. The good news is that it’s positive. The bad news is that LEI has been stuck at a fairly low level for three months. This report is sure to figure into the Federal Reserve’s policy deliberations. 

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