May 31, 2016

The major stock market averages opened lower this morning (Dow -93 pts; SPX -.26%). Telecom and utilities sectors are up modestly, while most everything else is lower. The VIX Index is trading up to about 14, which is not considered elevated but we’ll see where it goes from here. The SPX is in the process of testing resistance (a prior high) at about 2110. It has failed at that level several times in the last year. So short-term traders are on alert. The dollar is modestly lower and commodities are mixed. Oil is trading up toward $49.90/barrel, and remember we haven’t seen oil trade consistently around $50 since last fall. Bonds are mixed. The 5-year Treasury yield is unchanged at 1.39% and the 10-year is unchanged at 1.85%. 

We got the April Personal Income & Spending report this morning, and it is encouraging. Consumer spending popped a better-than-expected 1.0% (best since 2009) in the month. After subtracting inflation, spending rose .6%. On a year-over-year basis spending is up 3% and core inflation is rising at a modest 1.6% clip. Incomes rose .4% in the month as expected and on a year-over-year basis are up 4.4% (about 3.3% adjusted for inflation). Consumers reduced their savings rate in order to spend a little more, but that’s ok because we’re still at or above the long-term average savings rate of about 5.5%. The numbers are trending in the right direction. 

At the same time, the manufacturing sector continues to struggle. The Chicago Purchasing Managers Index (“Chicago PMI”) edged lower to 49.3 in May vs. economists’ consensus forecast of 50.5. Remember, any reading below 50 indicates contracting business activity. The forward-looking “new orders” component of the report is also sub-50. The Dallas Fed’s Manufacturing Activity Index also fell to -20.8 vs. -13.9 in the prior month. This index has a different scale; any reading less than zero indicates contraction. It has been below zero for 17 consecutive months. Obviously, the Dallas region has been hard-hit by the plunge in oil prices.  

Medtronic (MDT) reported slightly better revenue and earnings than Wall Street analysts expected. Unfortunately, profit margins fell a bit more than expected (gross margin to 68.8% from 69.8%). Part of the reason for that was currency fluctuation (strong dollar). Sales in the spine division fell flat due to lost market share, but the company gained share in cardiac rhythm. Management said it expects margins to improve, and clearly we can expect more stock buy-backs and acquisitions. Shares are down 1.4% this morning. 

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