Stocks opened modestly higher this morning (Dow +35 pts; SPX flat), led by telecoms, banks, biotechs and semiconductors. Interest rate sensitive sectors (utilities, real estate) are in the red. The VIX Index still treading water under 10. WTI crude oil is trading back up over $51/barrel and that is helping sustain the stock rally. Bonds are trading a bit lower today as yields resume the march higher. The 5-year Treasury yield is currently at 1.93% and the 10-year yield edged up to 2.29%.
Tom Lee, investment strategist at Fundstrat Global, has shifted his view more positively on the stock market. He admitted on Friday that his firm “got steamrolled” due to his cautious stance over the summer. High yields, which had been widening, just tightened again and he sees that as a positive trend. It means junk bonds are confirming strength in stocks. In addition he notes strong seasonal trends into year-end. And European stocks and junk bonds are doing well with positive spillover effects in the US. Asked about his outlook on FAANG stocks (Facebook, Apple, Amazon, Netflix, Google), Mr. Lee said he believes they will continue to work this year. But “for whatever reason, FAANG only works in odd years.” Strange comment, but he’s right. Since 2014, FAANG stock have led the market in odd years but have struggled in even years.
Investment strategist Jim Paulsen discussed his outlook for the stock market on CNBC this morning. In “looking for the [next] bear [market],” he says investor attitudes are going to have to get a lot more positive and carefree. We’ve been climbing a “chronic wall of worry” and continued skepticism about the economy and market have actually sustained the bull market. Bull markets typically don’t end until we go through a euphoric buy-anything-you-can phase. In addition, he notes the economy continues to grow nicely without aggravating inflation and interest rates. That’s a good thing and he believes the next bear market won’t come until and unless inflation accelerates. That’s because inflation sparks stock valuation concerns and higher interest rates make bonds a stronger competitor for investor dollars. More specifically, he’d be worried if the 10-year Treasury yield popped above 3%. Absent that, he concludes, “I just don’t see how this market won’t continue to trend higher…” If Mr. Paulsen has any real concern, it is that investors are getting used to the fact that the economy is doing well, so there may be fewer positive surprises to push stocks higher. “Without that additional surprise momentum, we may see…a pause in this market” toward year-end. But that would be temporary.