January 5, 2016

The major stock market averages opened lower this morning (Dow -72 pts; SPX -.3%). Consumer staples is the only sector hanging onto to a small gain. The banks are off by 1% in early trading. However, quite a few individual stocks are up on the day: Amazon, Aetna, Alphabet, Facebook and Honeywell, for example. The VIX Index—a measure of fear among traders—continues to dive and is now trading under 12. That’s considered very low. The dollar is weaker for the second consecutive session after reached a 14-year high at the end of 2016. Some give-back is normal, but we also understand China is moving to strengthen its currency. Anyway, that’s helping commodities rally. Gold, copper and oil are higher on the day. WTI crude is trading up to $53.80/barrel, hovering around a 1 ½ year high. Bonds are rallying as yields tick lower. The 5-year Treasury yield shot up to 2.09% by mid-December but have since fallen back to 1.88%. The chart pattern for the 10-year Treasury is the same; the current yield is 2.39%. 

According to First Data, holiday retail sales during December (on debit & credit cards) rose 3.5% over prior year levels. That’s a solid number, but gains didn’t accrue to all retailers. Yesterday, Macy’s said the holiday shopping season was terrible, and that early signs of success over the Thanksgiving weekend proved a head-fake. Same-store-sales over the November-December time period fell 2.1%. The CEO said the company is cutting 6,200 jobs and will close more stores. The online business was decent, but brick-and-mortar stores fared poorly. Separately, Kohl’s reported terrible results as well, with same-store-sales in November-December falling 2.7%. Management also cut its earnings outlook. 

Payroll processor ADP says the economy generated 153,000 new private sector jobs in December. The report suggested job growth slowed from its recent pace of 180,000 to 200,000 per month. That’s to be expected since the economy is very close to full employment and CEOs are complaining that it is increasingly difficult to find “qualified” workers. Hiring at small companies slowed significantly. And while manufacturing companies continue to shed employees, services companies are still hiring. No change there. We note the more important Employment Situation Report comes out on Friday; this ADP report may temper expectations.  

ISM’s non-manufacturing index held steady at 57.2 in December. This is a closely-watched gauge of business activity in the services sector. The results was better than economists expected, and the index is now at its highest level since October 2015. Services businesses make up about 90% of the economy. The index also picked up a significant jump in new orders, suggesting continued strength in coming months. By the way, ISM’s manufacturing business index recently hit a 2-year high. These reports are key evidence that the economy is accelerating.  


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