June 30, 2016

The major stock market averages are higher in early trading (Dow +53 pts; SPX +.58%). So this is the third consecutive day of recovery for stocks following the Brexit smack-down. In fact, the SPX has now retraced most of that beating. At the moment, all ten major sectors are in the green, led by consumer staples and industrials. But this is not an all-out risk-on day because the defensive sectors are really holding their own. This indicates that investors’ appetite for safer dividend-paying stocks is not waning. 

The US dollar is slightly higher on the day, and is up 2.5% in the wake of the Brexit vote. That’s really pushed commodities lower, except for gold. Today, WTI crude oil is down 2% to trade around $48.80/barrel. What is strange is that stocks are up at the same time bonds prices are rising. The 5- and 10-year Treasury yields are back down to 1.02% and 1.48%, respectively.  

There are still a lot of questions about why markets have bounced back so quickly from the Brexit dip. What is clear is that Brexit has completely whip-sawed Wall Street. It’s almost as if every money manager was caught off-sides and had to adjust quickly—twice. But despite the huge volatility, the SPX is still trading in a range of roughly 2000 to 2100. 

The Chicago Purchasing Managers Index (“Chicago PMI”) spiked to 56.8 in June vs. 49.3 in May. This is a massive move for the index, which measures the health of manufacturing business activity in the Chicago area. It’s also the highest level since the beginning of 2015. The only bad news in the report was a decline in hiring activity for factories.

Bloomberg ran an article making the case for a continued economic expansion in the US (rather than recession). I’ll quickly summarize some positive trends in the economy: steadily falling unemployment insurance claims; rising job openings; acceleration in wage growth; improving consumer confidence. The article also mentioned (and this is a big one) improvement in pricing power for US companies. If true, that’s a very strong indication that the US consumer is strong enough to begin pushing some inflation back into the system.

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