August 16, 2016

The major stock market averages opened lower today (Dow -50 pts; SPX -.36%). Eight of ten market sectors are lower, led by telecom and utilities. European markets closed down .5% to 1%. Asian was down overnight. Yesterday, the Dow & SPX reached all-time closing highs. Volatility is pretty low; over the last three weeks the SPX has only moved more than .5% in two trading sessions. The VIX Index is up a bit today to 12. This morning the dollar is weaker against a basket of foreign currencies and oil is higher. WTI crude is trading up 1.7% to $46.50/barrel. Bond yields are rising across the board today. The 5- and 10-year Treasury yields are trading at 1.16% & 1.58%, respectively.  

In an interview yesterday, economist David Rosenberg addressed Fed jitters and his outlook on the stock market. “I doubt very highly the Fed is going to raise interest rates.” He believes the Fed has “learned its lesson” based on what happened after their first rate hike last December. Mr. Rosenberg’s outlook is muted: with the market trading at 20 times earnings and the VIX at 11, history would tell you the market will be flattish going forward. So he councils investors not to obsess about returns for the major averages (i.e. S&P 500), but to look for sectors that can outperform. For example, he likes the cyclical sectors, which have lagged the defensive sectors this year. 

US housing starts climbed a better-than-expected 2.1% m/m in July to an annualized rate of 1.2 million units. Ground-breaking on new homes has accelerated nicely over the last four months to match post-recession highs. About 770,000 of those units are single-family homes and the rest are multi-family, such as apartments. The long-term US average for housing starts is somewhere in the range of 1.2 – 1.5 million per year. This report will be additive to third quarter economic growth (GDP).

The Consumer Price Index (CPI) decelerated a bit in July, confirming that retail inflation remains tame. Prices rose .8% y/y in July, down from the 1.0% rate in the prior month. The so-called “core” rate of CPI, which excludes food & energy, also decelerated to a 2.2% annual rate. Remember, the Federal Reserve won’t likely begin raising interest rates until we see a sustained accelerating trend in inflation. That will eventually happen, and it will likely begin with rising wages because the labor market is now pretty tight. We learned today that real (inflation adjusted) weekly earnings grew at a 1.4% rate in July vs. 1.2% in the prior month. So wage growth is outpacing inflation, but not by much. 

CNBC reports credit card balances are rising across the US. Total balances are up 6% from year-ago levels, partly because the job market has improved and wages are rising. In addition, it looks as though millennials are really beginning to utilize credit. Over half of credit card originations were millennials opening their first card. Credit trends are a bit concerning, though. Sixty percent of those opening credit cards are sub-prime borrowers with credit scores below 660.  


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