December 8, 2017

Stocks opened higher this morning (Dow +76 pts; SPX +.4%). Most market sectors are in the green, led by healthcare and energy. The only sectors retreating are utilities and consumer staples. The VIX Index is down to 9.7 and VIX January futures are trading down around 12.4. The dollar is stronger on the day due to some strong economic data. Commodities are also higher. WTI crude oil is back up to $57.45/barrel. Bonds are little changed but the yield curve steepened just a bit. The 5-year Treasury yield is fat at 2.14% and the 10-year is up around 2.37%. 

Bloomberg News surveyed economists on what they think will happen to the yield curve next year. Most think it will continue to flatten and could even invert within a year or two. However, “responses were mixed regarding whether the yield curve remains a reliable recession indicator after years of monetary stimulus. If you’re in the ‘yes’ camp, that means positioning for a recession in coming years as higher rates choke off economic growth. For those who lean toward ‘no,’ inversion doesn’t carry greater meaning beyond betting against short-dated Treasuries and favoring long bonds.”  The point is, Wall Street isn’t even sure whether an inverted yield curve is still the death knell for the business cycle that it used to be. 

Famed investor Leon Cooperman says he sees no euphoria in the broad market, and neither does he believe this a tech bubble. “In 2000, Cisco Systems was [trading at] like 100 times free cashflow. It’s [now] 11 or 12 times free cashflow. Oracle, the same thing. You know, 20 times earnings for Google, 70 times earnings for Facebook. That’s not euphoria. Relative to growth rates, that’s low! That’s low!” This is an important comment from a guy with enormous influence among Wall Streeters. The common perception is that all hedge funds are preparing to dump technology stocks because they’ve had a great year. 

The US economy generated 228,000 new jobs in the month of November, pleasantly surprising economists who expected about 195,000. The job tally for October was revised a bit lower but still remained a very strong 244,000. The unemployment rate held steady at 4.1%, which is considered “full employment.” Under-employment, also called “U-6,” edged up to 8.0%, but is still at 10-year lows. The labor force participation rate, at 62.7%, didn’t budge. OK, now for the important stuff. Average hourly worker earnings accelerated back to 2.5% y/y growth, implying a slight rise in inflation. But economists were expecting a much bigger increase to 2.7%. And remember, rising wages are often a precursor to higher inflation throughout the economy. So once again, we find that inflation is stuck in low gear. This is good because low interest rates are fuel for the stock market. It’s also bad because, within limits, rising inflation usually signals a pick-up in economic growth. And since we know without a doubt that the economy is accelerating, we’re not quite sure why inflation is not moving in tandem. 

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