July 5, 2016

Stocks opened lower this morning, following weakness in Europe. The Dow and S&P 500 are down 120 pts & .8%, respectively. The VIX Index is back up around 16 and VIX July futures are trading up around 17. So volatility isn’t expected to wane in the next 30 days. The defensive sectors (consumer staples, telecom and utilities) are holding up well despite really stretched valuations. The cyclical sectors, on the other hand, are struggling to maintain last week’s momentum. Energy stocks are down 2% in early trading and WTI crude oil is down over 4% to $46.80/barrel. The dollar is stronger this morning and commodities are sharply lower. Bond yields are also lower. The 5- and 10-year Treasury yields are trading around .94% & 1.37%, respectively. And by the way, German Bund yields are down to all-time lows. So currencies and yields are telling you the stock market won’t likely break out to new highs in the near term. 

Morgan Stanley strategist Adam Parker says his firm is making substantial changes in its stock portfolio after under-performing in the first half of the year. Mr. Parker reduced exposure to cyclical sectors like consumer discretionary, financials and technology while modestly increasing exposure to consumer staples and energy. The firm’s new positioning is more cautious.   

Durable goods orders fell 2.3% in May following a 2.2% decline in April. This was widely expected. With an uncertain global macro environment and weak corporate profits here at home, businesses are hesitant to invest. Orders excluding both defense equipment and aircraft (a proxy for future business investment) fell just .4% following a .7% decline in the prior month. Barron’s notes that this report would have been weaker without “price-related gain in oil-related subcomponents.” So there’s not a whole lot to inspire confidence in the report. 

The US economy isn’t terribly weak, but it isn’t strong either. Citigroup’s Economic Surprise Index, which measures the degree to which economic data is coming in better or worse than expected, has been negative all year. It currently hovers around -13. But that’s better than it was at the beginning of the year (or a year ago). The trajectory of the chart is modestly encouraging, but Brexit’s impact on near-term economic activity is obviously unknown.  

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