July 6, 2016

The major stock market averages are slightly lower in early trading (Dow -30 pts; SPX flat). Biotechs and some retailers are in the green, but most sectors and industry groups are down. The VIX Index is up again, hovering around 16.5, and VIX August futures are up to 18.5. The dollar is modestly stronger on the day and commodities are generally weaker (except gold +3.5% this month). WTI crude oil is down around $46.40/barrel. Longer-term bond yields continue to head lower as volatility overseas is pushing more capital into US Treasuries (and dividend stocks, by the way). The 10-year Treasury yield is trading down around 1.38%. The 10-year briefly fell near this level back in the summer of 2012. But for all intents and purposes, long-dated Treasuries are trading at all-time low yields. Allianz’ Chief Economic Adviser Mohamed El-Erian says the US no longer controls its own yield curve. 

ISM’s Non-Manufacturing Composite, which measures the health of business activity in the services sector, jumped to 56.5 last month from 52.9 in May. That’s the fastest pace of business activity growth since November of last year. The index’s new orders component was especially strong, surging to 59.5. The employment component suggests companies resumed hiring activity, albeit at a lower pace than we saw last year. According to Bloomberg, this report points to a “solid growth rebound in the current quarter.” 

Ron Paul, famous to doomsday predictions, has made another one. He says artificially low interest rates driven by monetary policy will result in weak stock market performance for a long time. Economically, he says “we’re out of steam,” and he wondered aloud if the US is already in recession. On the other hand, Wharton Professor Jeremy Siegel says investors need to watch corporate earnings to predict stock returns. “If we get a good second half of the year earnings-wise, then I think the market could be up 10-15%.” He notes that interest rates remain low and monetary policy is dovish so adjusted for those factors the P/E on the stock market is not high.   

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