December 1, 2017

The major stock market averages opened down after the Dow hit 24,000 for the first time yesterday. At the moment, the Dow is down 133 pts and the SPX is down .6%. The energy sector shot up over .8% in early trading. Pharmaceutical stocks are also up over .6%. On the other hand, most everything else is in the red. Semiconductors are down 2% and transports are down 1%. VIX Index futures, which attempt to guess at market volatility over the next couple of months, are up around 11.7. That’s still very low. The dollar is a bit stronger today but commodities are up a lot. Bloomberg’s Commodity Index is up over 1% today. WTI crude oil, which has been in an up-trend since June, is now at $58.70/barrel. Apparently, OPEC decided to extend is self-imposed production cuts through the end of 2018. On one hand, OPEC is not to be trusted. On the other hand, Saudi Arabia really needs to boost oil prices in front of its IPO of Aramco next year. Bonds are modestly higher in price today. The 5-year Treasury yield is at 2.11% and the 10-year Treasury yield edged down to 2.40%.   

ISM’s Manufacturing Index fell back a bit to 58.2 in November from a 10+-year high of 58.7 in October. This closely-watched gauge of business activity in the factory sector is still at very elevated levels and Bloomberg says this report “signals durable gains.” In other words, we should expect continued strength in manufacturing activity. As evidence, the index’s forward-looking new orders component increased to 64, which is near the high end of the 30-year range. The report also suggested that factory inventories shrank at the fastest pace this year, suggesting further production gains in coming months. 

CNBC’s Jim Cramer succinctly explained the reasons for the stock market’s ongoing rally. First, he said, “You have to abandon all cynicism in order to understand this market.” Yes, stock valuations are “getting stretched.” But this is a “melt-up” with real fundamental underpinnings. For the first time in recent memory, Washington is actually helping the stock market. Tax reform looks like it will pass, meaning corporate tax rates are on the way down and that means stronger earnings expectations for 2018. In addition, economic data in the US has been increasingly positive over the last several months. And we know that the rest of the world is enjoying stronger economic growth as well. And finally, investors are beginning to think Amazon (AMZN) can’t actually destroy the rest of the market, so we’re seeing a rebound in some retailers that have been held down (i.e. Costco, Wal-Mart, Kroger). 

The FBI’s investigation into Russian involvement in the US election just took an interesting turn. ABC News reports President Trump’s former national security advisor, Michael Flynn, is expected to plead guilty to charges that he lied to the FBI. He may also say that the president directed him to contact the Russians, which obviously would be very damning. President Trump has so far remained above the fray.  

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