February 17, 2017

Stocks gapped down at the open, giving back a little of this week’s rally. The Dow and SPX are currently down 70 pts & .29%, respectively. Consumer staples is the only major market sector in the green at the moment. Gold miners, banks, oil companies and telecom carriers are down the most. Most of the rest of the world is in sync: Europe is poised to close down .5% to .8% and Asia was down roughly .5% overnight. The VIX Index is up, trading near 12—nothing to worry about yet. Volatility has been very low and that is making short -term traders nervous. Bonds are trading higher in price, down in yield. That’s to be expected when stocks are lower. The 5-year and 10-year Treasury yields are down to 1.91% and 2.42%, respectively. In addition, the 2-year Treasury yield doesn’t appear to be building in a March rate hike from the Federal Reserve. 

The trend so far in 2017 is positive. The S&P 500 Index is up 4%; Euro Stoxx 50 Index is up 1%; Nikkei is up 4%; Brazil’s Ibovespa is up 17%, Shanghai Composite is up 4%. It certainly looks like Jim Paulsen of Wells Capital Management was right when he predicted a synchronized global recovery. Citigroup has a series of “economic surprise” indicators that measure the degree to which economic data are coming in better than expected. The firm’s Europe, China, and emerging markets economic surprise indices are all significantly higher than they were a year ago. 

The US Index of Leading Economic Indicators (LEI) rose .6% in January from December levels. That’s a bit higher than economists expected. LEI is a composite of 10 different indicators attempting to predict how strong the economy will be in the near future. It is sometimes used to find inflection points in the economy. On a year-over-year basis, LEI is finally improving (+2.5%) after a long, 2-year dip. This is a good sign. By the way, Citigroup’s US Economic Surprise Index just popped above 53, the highest since the beginning of 2014. 

Fourth quarter earnings report season is nearly over. About 400 of the S&P 500 companies have already reported. Results have generally been better than expected. Aggregate sales and earnings growth are tracking to 4.6% and 5.5%, respectively. That’s the strongest growth in a couple of years. Mike Ryan, Chief Investment Strategist at UBS,  said in a CNBC interview that he believes S&P 500 earnings are accelerating and will grow by 11% this year.  

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