May 27, 2016

Stocks gapped up at the open, yet again reversing the prior day’s course. The Dow and SPX are currently up 17 pts & .28%, respectively. The Nasdaq is faring a bit better, up .48%. Healthcare, tech, consumer discretion and financials are trading higher; energy and utilities are lower. By the way, over the last week or so the stock market has retraced the losses of early May. WTI crude oil is down slightly to $49/barrel, and that’s putting a little pressure on stocks. Bonds are mostly unchanged. The 5-year and 10-year Treasury yields are at 1.35% and 1.84%, respectively. 

Tom Lee of Fundstrat Global appeared on CNBC saying the rally in high-yield (“junk”) bonds is telling us the stock market will head higher. The SPDR US High Yield Bond ETF is up 6% this year—twice the S&P 500 Index return. Not only that, he noted credit spreads are narrowing. That is, investors’ perceptions of credit quality are getting better. He says that since 1983, every time junk bonds had a 10% or higher return, the “stock market has returned double digits” as well. This is a big move in credit, and “stocks follow credit.” Now, I’d like to point out that back in early February credit conditions and junk bond prices were a huge problem. Credit spreads were widening and any stock or bond related to high-yield was in the tank. And the bears were citing weakening credit as a key reason why recession as right around the corner. So this kind of rapid snap-back in junk bonds is truly remarkable. 

Tilman Fertitta, CEO of Landry’s, addressed the impact of the oil glut on CNBC yesterday. His business is based in Houston, which has been hard-hit by oil company layoffs. Even though oil prices have recovered somewhat, he expects a lag between higher oil and better consumer spending. For now, the consumer is “choppy.” Hotel rates are coming down and there is “no momentum” in retail and restaurants. 

First quarter gross domestic product (GDP) was revised up to .8% growth vs. the initial estimate of .5%. Personal consumption—the piece investors are most interested in—was left unchanged at 1.9% growth. The GDP price index, which measures inflation, was revised a tick lower to .6%. The “core” price index—excluding food & energy—held steady at 2.1% as expected. There’s no real news in this report. 

*The foregoing content reflects the author's personal opinions which may not coincide with the opinions of the firm, and are subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. All investing involves risk. Asset allocation and diversification does not ensure a profit or protect against a loss. Finally, please understand that–as with other social media–if you leave a comment, it will be made public.