November 29, 2017

Stocks opened very mixed this morning (Dow +49 pts; SPX -.18%; Nasdaq -1.58%). Financials are up 1.7%, telecoms are up over 3% in early trading, whereas the tech sector is down 3%. This is clearly year-end profit-taking and a mini investor rotation. The VIX Index is up around 10.5. European markets will close higher by about .5%. Asia was mixed overnight. The dollar is unchanged and commodities are all over the place. Copper, gold and oil are down on the day. WTI crude oil is down 1% to $57.40/barrel. Bonds are selling off as yields head higher. Fed Chair Janet Yellen is before a congressional committee today and said the Fed is committed to raising interest rates at a gradual pace because “We don’t want to cause a boom-bust condition in the economy.” The bond market expects two rate hikes next year, whereas the Fed predicts three hikes. The next Fed Chair, Jerome Powell, recently said he believes the Fed’s policy interest rate should eventually move to 2.5% from the current 1.25%. This morning, the 5-year Treasury yield ticked up to 2.11%, the highest since mid-March. The 10-year yield climbed back to 2.38%. 

Yesterday, North Korea launched another ballistic missile over the Sea of Japan. Afterward, North Korea’s dictator declared that he can now hit the entire US with a nuclear weapon. Strangely, the stock market continued to rally. Today, President Trump called Chinese President Xi Jinping to discuss additional economic sanctions against North Korea.  

Third quarter economic growth—gross domestic product (GDP)—was revised up to 3.3% from the prior estimate of 3.0%. Consumer spending, a key component of the equation, rose a healthy 2.3%. After-tax business earnings rose 4.9% in the quarter and were 10% higher than year-ago levels. But the main reasons for the upward revision were stronger business investment in equipment & software, and also higher government spending. It has been a long time since I’ve been able to say that.By the way, the Wall Street Journal, President Trump, Congressional Budget Office and most economists consider 3% economic growth our country’s full sustainable potential. 

Pending home sales recovered nicely in October from hurricane-related disruptions in the prior month. Contracts signed rose 1.2% from year-ago levels. As expected, the biggest gains were in the south. It looks like the hottest pockets of demand are at the low end and new homes. But there is clearly still a mismatch between demand and supply. For-sale inventory continues to fall and is at the lowest level since 1991. That pushing up prices and denting affordability. 

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