February 6, 2017

The major market averages opened mixed this morning (Dow +13 pts; SPX -.1%). Most sectors are seeing modest declines led by energy (-.5%) and real estate (-.5%). Industrials and Tech are slightly higher. The VIX Index is up about 3% to trade around 11.3, which is still considered very low. In fact, the VIX sank to a 2 ½ year low last week. And again, traders are watching the fear gauge closely for signs that the Trump Rally is fading. The dollar is stronger on the day but commodities are mixed (gold, copper higher; oil lower). WTI crude oil surged to nearly $54/barrel last week but is trading back down to $53.30 today. We understand OPEC states seem to be abiding by the cartel’s stated production limits. Bonds are rising in price (down in yield) this morning. The 5- and 10-year Treasury yields are now at 1.87% and 2.45%, respectively. 

Last week, the Federal Reserve’s Open Market Committee unanimously agreed not to raise interest rates. While the committee agrees inflation has accelerated a bit recently and consumer and business sentiment has improved, the economy still isn’t strong enough to force a policy response. That’s one reason bond yields have come down a bit in the last few days. Bill Gross, famed bond fund manager, says the Fed’s neutral rate for its short-term policy rate is probably about 2% vs. about .66% today. So as the economy improves, we can expect more rate hikes. Currently, the market expects two or perhaps three hikes as we move through 2017. But that depends on progression in the economy and inflation. And speaking of the economy, I’ll point out that Citigroup’s US Economic Surprise Index has improved from -55 to +45 in the last 12 months. That means economic data have improved significantly, and more specifically, that economists’ forecasts are underestimating that momentum. 

This year, we’ll see a few significant political events in Europe. The French election is coming up in May. Traders are worried about populist candidate Marine Le Pen. Over the weekend, her campaign pledged to take France out of the Euro currency if she is elected. That’s pushing European stock markets lower today. Her plan to “restore France’s sovereignty” also aims at revoking the independence of the European Central Bank. Needless to say, and especially after the Brexit vote in the UK, traders will be watching her campaign closely. 

We’re now a little more than halfway through fourth quarter earnings report season. About 280 of the S&P 500 companies have reported and aggregate sales and earnings growth are tracking to 4% and 6%, respectively. That’s a little better than Wall Street was expecting a few weeks ago.  

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