January 6, 2017

Stocks opened lower but quickly turned around. At the moment, the Dow and SPX are up 30 pts and .16%, respectively. And by the way, the Nasdaq just hit a fresh all-time high. Telecoms are down 2.2% in early trading; that’s just give-back after they rallied 8% in December. Gold miners are down about 2.8% today, proving that gold is volatile. The energy sector is a bit lower even as crude oil holds steady at about $53.80/barrel. The VIX Index continues to trend lower and is now trading at 11.3. Typically, when the VIX is falling the stock market is rising. Bonds reversed course this morning and yields are up. The 5- and 10-year Treasury yields are trading at 1.91% and 2.141%, respectively. 

CNBC interviewed investing giants Leon Cooperman of Omega Advisors and Professor Jeremy Siegel of Wharton. Mr. Cooperman says optimism has finally entered the market. He’s looking at 2017 as a year in which we continue to move toward normalization. That is, interest rates, inflation and corporate profits are going up. P/E ratios are probably coming down, however. He describes himself as “mildly positive” and sees about 5% upside in the market. This is not a time to pay-up for pricey stocks. He expects S&P 500 earnings to be in the range of $130/sh. to $140/sh. depending on how successful Donald Trump’s agenda political agenda is. He feels like the S&P P/E ratio should be around 17. And by the way, it is currently  17.3. Finally, Mr. Cooperman reminds us that if interest rates remain low, that means economic growth is weak. So if the economy is getting better, rates won’t stand still.  

Jeremy Siegel’s take on 2017 is slightly different. He is cheered by the prospect of lower taxes, repatriation of corporate cash held overseas, and de-regulation under President-Elect Trump. But he doesn’t believe rates will rise very much this year because growth is just starting to accelerate. He calls for a 10-year yield in the 3% to 3.5% range by the end of 2017. He think the P/E multiple on the market could be as high as 18 or 19. He sees SPX earnings at $130 this year. So that implies a 9% return on the S&P 500 this year. 

The Labor Department announced that the economy added a net new 156,000 jobs in December, and the prior month payroll tally was upwardly revised to 204,000 from the initial estimate of 178,000. So this report confirms job growth is still healthy but slowed somewhat last month. The national unemployment rate (“U-3”) ticked up to 4.7% in December from 4.6% in the prior month. The so-called under-employment rate (“U-6”) fell to 9.2% (the lowest since April 2008). But none of that is nearly as exciting as the fact that average hourly worker earnings shot up 2.9% y/y. And that comes despite a slightly lower average workweek (34.3 hours). That’s the fastest wage growth since the middle of 2009 and the Federal Reserve will certainly take note. The job market is now sufficiently tight enough that wages are taking off. 

US corporate capital spending is beginning to recover. The Commerce Department says orders for durable goods (excluding defense equipment and aircraft) rose .9% in November. And orders have increased in five of the last six months. Orders for communications equipment, machinery and primary metals improved. On a year-over-year basis business investment is still weak. Capital spending is down 1.5% y/y but that’s much better than the -8% decline last July. 


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