December 12, 2017

Stocks surged at the open (Dow +129 pts; SPX +.28%). Believe it or not, telecoms are leading the way (+1.8%). Banks and pharmaceuticals are also up over .8%. On the other hand, the utilities sectors is down 1% in early trading. European markets are poised to close modestly higher. The VIX Index is back up to 9.5. WTI crude oil is down .8% to $57.48/barrel (still right around 2+year highs). Bonds are selling off this morning and yields are moving up after some higher than expected inflation data. The 5-year Treasury yield is up around 2.18%, the highest since April 2011. The 10-year yield is also picking up to trade around 2.42%. The next resistance level is 2.57%. 

Wall Street is mulling the tech sector, which has appreciated more than 30% this year. Bank of America Merrill Lynch says last month’s tech correction has created a great buying opportunity. The sector’s P/E ratio dipped and if it were to go back to its historical average that could mean 10% upside in the near future. The firm’s proprietary model still ranks technology number one among the 11 sectors in terms of price momentum, relative valuation and positive earnings revisions. On the side, Morgan Stanley is more wary of the tech sector. “While we believe that fundamental drivers for these stocks remain intact, history indicates returns may moderate their pace and we question whether growth over value can continue to be as meaningful a driver of returns.” In other words, after a 30+% year, you’re not as likely to see strong returns next year. Citigroup’s view is that investors should probably favor bank stocks over technology in 2018. The firm believes rising bond yields and inflation will make financials a must-own. 

The Producer Price Index (PPI) accelerated in November to 3.1% y/y growth, a bit higher than expected. That’s the highest wholesale price inflation since early 2012. Could this be an early sign of accelerating inflation throughout the economy? Most of the increase was driven by rising gasoline prices. But the cost of light trucks, pharmaceuticals, beef and electric power also moved higher. Excluding the more volatile food & energy categories, PPI rose 2.4% exactly as expected. Even so, this measure of wholesale inflation is up to a multi-year high. 

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