Stocks opened modestly lower this morning. The Dow and SPX are currently down 9 pts & flat, respectively. Unlike on Friday, the defensive sectors (telecoms, utilities, consumer staples) are lower today. On the other hand, biotechs, gold miners and energy stocks are higher. The VIX Index is hovering around 11.7, near the low end of its 1-year range. So investor nervousness is low. Commodities are mixed but WTI crude oil is up around $54.25/barrel. The 5- and 10-year Treasury yields are mostly unchanged, trading at 1.83% and 2.33%. respectively. The 10-year has been stabilized in the range of 2.3% to 2.5% over the last two months.
Jim Paulsen, Chief Strategist for Wells Capital Management, was interviewed on CNBC last Friday. “The two most important things for Wall Street are less regulation and a tax cut.” But this market rally is less about political & fiscal policy and more about the “synchronization of global economic growth…a recharge of the earnings cycle…moving away from deflationary risk…” He sees a “cocktail of really wonderful stuff” that is moving the market. Mr. Trump can get away with saying whatever he wants because “economic and earnings momentum is just too darn good.”
On the other hand, Krishna Memani of Oppenheimer says we need an increase in business investment for this stock rally to go to the next level. And that’s going to required higher deficits and more government debt. But he’s worried congress just doesn’t have the appetite for lot of additional debt. “What we need is a fiscal expansion…and it doesn’t look like we’re going to get it today.”
Pending home sales fell 2.8% in January from December levels according to the National Association of Realtors (NAR). The industry organization says higher mortgage rates and low for-sale inventories are restraining sales. This index measures the volume of contracts signed during the month, so it’s an early indication of closed sales within the next 30-60 days. This is clearly a seller’s market. NAR confirms that buyer traffic is significantly higher than seller traffic. And the result is that pending home sales aren’t much better than they were a year ago.
Durable goods orders came in higher than expected last month. Corporate orders for long-lived equipment rose 1.8% m/m largely due to a temporary spike in aircraft orders. Stripping out aircraft and military equipment, orders actually fell .4% in January, ending a 3-month streak of monthly gains. Barron’s says this “pulls the rug out from expectations for a first-quarter business investment boom as indicated by business confidence readings.” That’s really what this index is trying to measure—the degree to which businesses are investing in growth. My view is that month-to-month changes aren’t necessarily the best way to assess trends in business investment. Year-over-year changes are often more instructive. And so on a year-over-year basis, orders for corporate capital goods (excluding military & aircraft) rose 2.6%. And that’s the highest growth rate in orders since the fall of 2014. So make no mistake, businesses are beginning to invest again.