October 25, 2017

The major stock market averages gapped down at the open (Dow -105 pts; SPX -.9%). Telecoms, utilities, and industrials are leading the market lower, but all eleven market sectors are in the red. Not surprisingly, the VIX Index jumped to 12.4, the highest level since early September. The dollar is weaker today against a basket of foreign currencies but commodities aren’t getting a corresponding life. WTI crude oil is down .5% to $52.20/barrel. Despite weakness in the stock market, the bond market isn’t trading higher. The 5-year Treasury yield ticked up to 2.06% (highest since early March) and the 10-year yield rose to 2.44% (highest since late March). Rates are clearly moving higher and stock investors are a little spooked by it. Rick Rieder of Blackrock says despite recent economic data, inflation is rising because the economy is doing better. But he’s not that worried that rates will move dramatically higher. 

Durable goods orders came in better than expected, confirming the recent up-trend in business investment. September orders accelerated to 8.3% year-over-year growth. Even excluding a 64% jump in commercial aircraft orders, orders for core capital goods still grew 7.0%, at the high end of the range we’ve seen over the past three years. 

New home sales surged nearly 19% in September to an annualized rate of 667,000 units. That’s the highest monthly tally since October 2007. The number of new homes for sale held steady at 279,000, but that’s only 5 months’ worth at the current rate of sales. Low for-sale inventory continues to be an issue. The strength of this report is a bit bizarre since we’re not seeing any evidence of hurricane-related disruptions. 

David Kelly of JP Morgan wrote an op-ed in Barron’s this morning warning that “investors need to be particularly careful this late in a cycle not to become overly enthusiastic about overvalued assets.” He acknowledges the recent improvement in economic growth and says the short-term outlook “looks good.” And in early 2018 investors can look forward to tax reform, which will boost the economy despite that fact that it is “neither affordable nor necessary.” He wonders, though, if in late 2018 higher interest rates will begin to restrain the housing market. And higher wage inflation could begin to cut into corporate earnings. With slower corporate earnings growth, stock market gains will surely moderate. Admittedly a wild guess, he says average total returns for stocks could slow to just 4.5% for the next five years. This is no reason to panic, he says, but it does call for caution. 

AT&T (T) reported a so-so quarter, missing on both revenue and earnings expectations. The video business didn’t inspire. The key wireless business, however, was strong. Customer churn fell to the lowest level on record, .84%. And the company added 3 million new wireless subscribers. Management said the Time Warner acquisition should close by year-end. The stock is down 3% this morning. 

Visa (V) reported an excellent quarter and the stock is up 1.6%. Revenue grew 14% from year-ago levels and earnings per share rose 15%. The number of transactions processed around the world rose 13%. In addition, the company benefited from its recent acquisition of Visa Europe, where transaction volume accelerated. And profit margins increased. 

Alaska Air (ALK) is down over 6% after reporting third quarter results. Revenue growth was a very solid 35%, but earnings per share growth decelerated to just 2%. Costs are rising, and the trend won’t moderate until next year. In addition, Alaska is adding seat capacity and analysts are concerned that fourth quarter revenue-per-seat-mile will fall. Most of these issues appear to be temporary, however, driven by the acquisition of Virgin America and a shortage of pilots at Horizon Air. 

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