December 19, 2017

Stocks opened lower this morning (Dow -38 pts; SPX -.16%). Exchange trade volume is very light as investors wait for congressional votes on the tax bill. Real estate & utilities are down the most (roughly 1%) as bond yields head higher. Tech is also weak, having lost some momentum over the past two weeks. Consumer staples and energy are trading higher. WTI crude oil is up modestly to $57.25/barrel. Bonds are selling off as yields tick higher. The 5-year Treasury yield soared to 2.21% today, the highest since April 2011. The 10-year Treasury note yield ticked up to 2.44%, the highest since March of this year. This is probably the only story that matters today (sorry Bitcoin). According to Bloomberg, an official with the European Central Bank said monetary policy discussions in Europe “are moving to the future use of interest rates rather than asset purchases to regulate the economy.” In other words, they could be reducing or removing quantitative easing some time in 2018. That immediately pushed up interest rates in Europe and is likely the proximate cause of higher US yields today. 

Holiday spending is on a tear. CNBC’s proprietary survey of 800 adults finds that consumers intend to spend over $900 this holiday season. That’s the highest amount in the survey’s 12-year history. More than 50% of respondents said the economy is in good or excellent shape. The Nat’l Retail Federation confirms strength in consumer sentiment and says it expects consumers to spend an average of $967 on holiday-related items. In terms of year-over-year growth, total holiday spending will likely rise 3.6% to 4%. 

CNBC Contributor Jim Cramer says bottom-up analysis of the stock market suggests the rally has a lot farther to go. That is, he encourages investors to look not at the S&P 500, but at individual companies, many of whom will benefit from corporate tax reform. Therefore, he says, Wall Street forecasts for corporate earnings will move higher. In addition, companies will likely use the extra cash to buy back more of their stock shares, and that means fewer shares out there for investors to buy. So while demand for stock is strong, supply is shrinking.  

CNBC Contributor Josh Brown addressed the lack of euphoria in the stock market. Yes, investors are increasingly optimistic, but not yet euphoric. Of course, there are pockets of ridiculous behavior, such as Bitcoin. But importantly, he notes, “No one is fetishizing Nvidia” (NVDA). In other words, the senseless euphoria is “happening away from mom and pop” and therefore doesn’t present a danger to the overall stock market.   
Housing starts rose 3.3% in the month of November to an annualized rate of 1.3 million units. In other words, new home construction is just now back to levels that will satisfy population growth. Digging into the details, multi-family (i.e. condos, apartments) is pretty well supplied. So in 2018 growth in the home construction sector will depend on single-family homes, which are under-supplied. For the second consecutive month, single-family starts are up 5-6%. 

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