June 10, 2016

1-year chart of the S&P 500 Index, courtesy of Bloomberg

1-year chart of the S&P 500 Index, courtesy of Bloomberg

The major stock market averages fell this morning. The Dow and SPX are currently down 95 pts & .8%, respectively. Most sectors and industry groups are lower in early trading, except for telecoms and tobacco. Banks, transports, oil & gas and semiconductors are down over 1%. The VIX Index continues to climb, now at 16, but still isn’t concerning. The dollar is up on the day and commodities are a bit lower. WTI crude oil is down to $49.60/barrel and it looks like stocks are still following oil around like ducklings after a mother duck. Traders are also focused on bond yields, and today German & Japanese sovereign bond yields took another step down to record lows. US Treasury yields also fell; the 10-year yield is down to 1.65%, testing a multi-year support level. 

The SPX is now up about 3% this year. That’s a lot better than most global alternatives. The Euro Stoxx 50 Index is down 7%, the DAX is down 5%, the Nikkei is off 2%, China is down big no matter how you slice it. A few regions are faring better, like Canada and Korea. 

With stocks having risen nearly all the way baJick to all-time highs, some softness is to be expected here. And the pattern we’re seeing—gap down at the open and recovery through the day—is actually pretty constructive. In the near term, I think it’s reasonable to expect one of two outcomes: 1) the SPX falls another 1.25% and finds support at the 50-day moving average; 2) the SPX climbs another 1.5% to test its all-time high. Anyway, those with an investment horizon longer than 6 months shouldn’t be focused on any of this, or “Brexit” or the presidential campaign. Instead, they should focus on corporate earnings expectations. Wall Street consensus estimates for S&P 500 companies reveal that investors think things are turning around. That is, corporate earnings will return to positive year-over-year growth in the second half of this year. So whereas corporate earnings fell about 2% last year, they are expected to rise about 5% this year. In short, the worst of the profits recession is likely over. 

Jim Cramer, CNBC contributor and host of Mad Money, said this morning he dismisses the negativity of Carl Icahn and George Soros (discussed yesterday in this blog). First, they have been consistently negative so yesterday’s headlines are not news. Second, he said “It’s very easy to be very rich and very negative.” 

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