March 27, 2017

Stocks opened lower again this morning (Dow -65 pts; SPX -.26%). The Dow is on a 7-day losing streak. Banks are leading the way lower (-.9%), along with transports (-.3%) and semiconductors (-.25%). Gold miners and biotechs are actually in the green. The VIX Index is up around 13.5 as consternation over the GOP healthcare bill grows. European markets just closed slightly lower and Asia was down overnight. The dollar is lower today, and is now down 3% year-to-date. But that’s not giving a lift to commodities this morning. WTI crude oil is down modestly to trade around $47.60/barrel. Bonds are rising in price as yields fall. The 5- and 10-year Treasury yields are down to 1.91% (1-month low) and 2.38%, respectively.

Goldman Sachs is telling its clients that the stock market will go nowhere for the rest of the year due to uncertainty over President Trump’s pro-growth policy agenda. Last week’s failure of the plan to replace ObamaCare was the president’s first significant setback. Goldman’s chief equity strategist, David Kostin, believes tax reform will come later, and will be less impactful than investors expect. Specifically, whereas the market expects the corporate tax rate to drop to 20%, Kostin says 25% is more likely and it won’t begin to benefit companies until next year. 

A week ago, Barron’s ran an article assessing the current market environment against a list of factors that typically end bull markets. First, there is the argument that this bull market, now 8 years in duration, is quickly running out of time. The author reminds us, however, that the S&P 500 experienced an intra-day correction of 21.6% in 2011, and that technically qualifies as a bear market. So actually, the current bull market rally began in October 2011 and is now about 5 ½ years old. Second, the author addresses the argument that a very low VIX Index shows investors are complacent and that is a sign of impending doom. He counters with LPL Financial research suggesting that when stocks go for 100 days or more without a 1% move, the market is usually higher one year later. Third, a common sign of danger is over-enthusiastic stock investing by retail investors. But the author points out that AAII’s Bullish Sentiment Index is currently very low. That is, only 35% of retail investors are bullish. With those arguments out of the way, he turns to the risks investors should actually be concerned about. First, some expectation for Trump’s promised tax cuts and infrastructure spending have clearly been priced-in to the stock market. Any significant delay in those programs/policies will hurt stocks. Second, the gradual improvement we’ve seen in jobs, manufacturing, housing and corporate earnings must continue apace. These “fundamental” underpinnings of the market are critical to the rally. What bull markets fear the most is an economic recession. 

Amazon (AMZN) has delayed the launch of its cashless convenience stores due to technical difficulties. The initiative is called Amazon Go, and it is the first retail concept without check-out lines and employees. Separately, the New York Times reports Amazon is considering opening brick-and-mortar stores to sell furniture and home appliances.  

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