February 28, 2017

Stocks opened lower this morning, just like the last two trading sessions. The Dow is flat, the SPX is down .14% and the Nasdaq is down .3%. Once again, the defensive sectors (utilities, consumer staples) are faring better than the cyclicals. The VIX Index is trading up around 12.2 and VIX March futures are trading up to 13.3. So the fear gauge is picking up just a tiny bit. The dollar is weaker today and has really sold off since mid-December. That’s helping commodities tread water or even rise a little. WTI crude oil is down this morning to $53.40/barrel. Remember, a year ago oil was under $30/barrel. Bonds are mostly unchanged today. The 5-year and 10-year Treasury yields are hovering around 1.85% and 2.35%, respectively. And I would argue the bond market isn’t yet signaling that a March Fed interest rate hike is imminent. 

Federal Reserve Bank of Dallas President Robert Kaplan believes the US economy will grow in excess of 2% this year, even excluding some policies (i.e. fiscal stimulus or tax cuts) that could boost growth. He sees the Fed’s dual mandate (full employment and price stability) as largely achieved. “We should begin the process of removing accommodation.” In other words, rate hikes will come. 

US economic growth (GDP) for the fourth quarter of 2016 was reaffirmed at 1.9%. Some of the internal numbers, however, were revised a bit. The revision was driven by higher than expected consumer spending (+3.0%) and lower than expected business & government investment. In addition, the report showed the US exports declined but imports rose 8.5%! GDP’s inflation gauge was revised slightly lower to 2.0%. For calendar 2016, GDP grew a scant 1.6% and that’s the slowest growth since 2011. The Federal Reserve forecasts GDP growth of 2.3% this year. 

Responding to criticism from the Trump Administration, Johnson & Johnson (JNJ) published a report outlining its drug pricing practices. 
On average in 2016, the company’s list price on drugs rose 8.5%. But after rebates and discounts—which are common—the “net” price increases were more like 3.5%. JNJ says it paid $11bil back into the system with discounts and rebates, so that equates to about 35% off of list prices. According to Bloomberg, most of the discounts & rebates go to intermediaries in the healthcare supply chain, such as pharmacy benefit managers and insurers. 

Goldman Sachs’ Chief US Equity Strategist, David Kostin, says he expects a stock market correction soon. "Near-term downside catalysts include (1) investor recognition that lower corporate tax rates may not take effect until 2018; (2) multiple Fed hikes; (3) European elections. We forecast S&P 500 will peak in 1Q at 2400 and end the year at 2300."

On the other hand, Warren Buffett was interviewed on CNBC yesterday and he was fairly upbeat. He is also focused on the long-term. Here’s what he said about American dynamism: despite “hiccups”, wars and the “panic” in 2008, “this country always comes back. We have not lost the secret sauce.” Regarding the stock market, he said, “We are not in a bubble territory, or anything of the sort.” He reminded us we have to compare stock valuations with interest rates. “Measured against interest rates, stocks are actually on the cheap side compared to historic valuations.” Of course, the risk for us is that interest rates could go up a lot. But he didn’t predict that outcome, either. 

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