May 24, 2016

Stocks surged at the open (Dow +192 pts; SPX +1.2%). The cyclicals (tech, financials, industrials, discretion) are leading the way, up over 1% in early trading. The VIX Index is down under 15, suggesting lower downside volatility in the next 30 days. The dollar is stronger on the day, but commodities are also rising. Copper, oil, and iron ore are all up over 1%. WTI crude is trading at nearly $49/barrel. Bonds are selling off, with the 5- and 10-year Treasury yields rising to 1.41% and 1.87%, respectively. 

By the way, one of the key bear arguments—articulated by Zacks Investment Research this morning—is that a falling 10-year yield and a rising 5-year yield tells us the stock market is poised for a pullback. That is, a “flattening yield curve” usually portends bad times for the economy and stocks. And it is true that lower long-term rates indicate very subdued inflation and (therefore) growth expectations. If the economy does begin to pick up, we’ll see the 10-year yield rise as well. But the current environment isn’t that easily analyzed. Our own bond yields are distorted by the fact that ultra-low/negative rates around the world are encouraging global investors to run for cover in US Treasuries. So there’s enormous external buying pressure keeping our Treasury rates lower than they ordinarily would be. 

Oppenheimer’s Ari Wald appeared on CNBC yesterday to present some research on what happens to stocks when the Federal Reserve embarks on a rate tightening cycle. He said over the past 13 Fed tightening cycles the worst case scenario for stocks has been a 10% pullback within the first few weeks. He noted we’ve already had a correction this year (which he correctly forecasted). Mr. Wald said it usually takes some time before rising short-term rates begin to crimp growth expectations and bring the market down. Typically, the Fed doesn’t cause the market to top out before the 2-year mark in a tightening cycle. That’s a sort of all-things-being-equal argument for a relatively constructive outlook on stocks. But all things are not equal with the global economic situation. So what does he want to see before giving stocks the all clear? Well, he believes we need to see global interest rates bottom and begin moving higher. Not only would that signal improvement in global growth but it would also take some downward pressure off of Treasury yields.  

Visa (V) CEO Charlie Scharf spoke at a JPMorgan industry conference yesterday. He said he doesn’t see a “weakening” economic environment. The company’s total payments volume in the US rose 10% y/y in April.  

CNBC reports many of us can expect sharp increases in healthcare insurance premiums. Insurers are losing money on the ObamaCare exchanges and they’re looking to recoup costs. Most of them are still trying to make it work, but as we have previously noted, UnitedHealth has actually pulled out of the exchange system due to profitability concerns. Consumers buying insurance on the exchanges who receive subsidies will likely receive larger subsidies in order to offset price increases. But those buying off-exchange and/or who don’t qualify for subsidies will see 10-30% premium hikes. 

New home sales surged 16% y/y to an annualized volume of 619,000 units. Economists were looking for a gain of only 2.5%. The numbers are skewed to higher end homes; the median home price shot up to $321,100 vs. the year ago level of about $280,000. For-sale inventories fell to 4.7 months of supply, which is considered very low. New home sales represent about 10% of the total housing market and sometimes the monthly data can get volatile. Still, a CNBC reporter characterized the report as “way weird.” 

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