November 10, 2017

Stocks opened lower again this morning (Dow -40 pts; SPX -.18%). The reason: “Doubts swirl on tax overhaul” according to Bloomberg. In the middle of yesterday’s session, the SPX briefly fell 1.18% from its recent all-time high, then recovered. Famed investor Mario Gabelli pointed out that a “1% correction is not a big event,” and if interest rates stay below 2.5%, the market can continue rallying for another “year or two.”  Bank of America/Merrill Lynch says yesterday’s rout was a “dress rehearsal, not the Big One.” The firm notes “insane gains” this year, especially within the tech sector, and one can expect a pullback. The firm says a full stock market meltdown would “require recession risk or moves higher in wage inflation, bond yields, and volatility or credit spreads.” They don’t see that in the near term. 

Today, gold miners, FAANG stocks, and railroad companies are trading lower. Consumer-facing companies, on the other hand, are faring better despite Nordstrom’s (JWN) unimpressive third quarter earnings announcement. Same-store-sales declined .9% from year-ago levels, which was a bit worse than analysts expected. But online sales rose 14%. The company lowered the high end of full-year 2017 earning guidance, partly due to hurricane impact and partly due to warmer weather expectations. The stock is down 1.6% today. 

Disney (DIS) reported mixed third quarter results, missing Wall Street expectations for both revenue and earnings per share. The quarter included some Hurricane Irma impact, as well as a negative valuation adjustment for Bamtech and impact due to delay of a film. Revenue in cable and broadcasting was flat from year-ago levels, and that was the cause of the miss. ESPN continued to lose customers. Parks and resorts, however, reported 6% sales growth, which was ahead of expectations. The stock fell 3% immediately after the announcement yesterday, but is up 2.5% this morning. 

Bonds are selling off today despite a weak stock market. The 5-year Treasury yield picked up to 2.05% and the 10-year yield is back up to 2.39%. And the way, the yield spread between the 2-year and 10-year Treasury yields—which can be viewed as an indicator of economic health—recently hit a 10-year low. All else equal, that’s a bad thing. But over the last few days the spread has actually increased. In addition, we are now watching the junk bond market for signs of credit trouble in the economy. A widely held fund, SPDR Barclay’s High Yield Bond ETF (JNK) is down 1.8% over the last few weeks and we’re hearing that all junk bonds funds are seeing negative fund flows. Just something to keep an eye on. 

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