March 6, 2017

Stocks opened lower this morning (Dow -80 pts; SPX -.6%). All eleven major market sectors are down, led by financials (-1%). The VIX Index is back up to 11.4 but that’s still very low. And the VIX for long-term Treasury bonds is actually higher (12.3). That means investors are more worried about volatility in the bond market than in the equity market. Bonds are lower today as yields rise. The 5-year Treasury yield is hovering around 2.02% and the 10-year yield ticked up to 2.49%.  

On Friday, Fed Chair Janet Yellen gave a speech in which she affirmed her outlook for 3 interest rate hikes for 2017. She also confirmed that monetary policy will tighten faster than last year. The 2-year Treasury yield did not react after the speech, which means that the bond market adequately anticipated the event. 

Famed equity strategist Tom Lee, who has been bullish on stocks for the past several years, admitted he picked the wrong time to turn neutral. After a very strong 2016, Tom told clients to expect less out of the equity market this year. But only two months into 2017, the S&P 500 is already up 7%, “vastly outperforming our expectations for a flat-to-down [first half]—in short, we have been steamrolled.” He is now advising clients to wait for a correction to invest new money. Tom recently coined the acronym CRAP to describe his recommended investments this year. That stands for computers, resources, American banks and phone carriers. 

Sam Stovall, chief strategist for CFRA, just raised his year-end target for the S&P 500 to 2,460, about 3% higher than current levels. He’s not alone. CNBC says much of Wall Street is trying to “keep up” with the rally. 

CNBC also interviewed Jim Paulsen, chief investment strategist at Wells Capital Management. “This is a much more fundamentally driven rally… than just Trump.” He argues that the real story behind the rally is a “steady stream of really good economic and earnings momentum information.” He has been predicting a synchronized global economic upswing for quite a while. Despite strong gains since the election, Mr. Paulsen thinks the rally will continue on to higher levels before we get a correction. And he sees interest rates rising sharply: the 10-year Treasury yield might reach as high as 3.5%. Ultimately rates will “bite” the stock market, and the real question is, how high can rates get before hurting stocks. At the moment, rates are very low and rate hikes are positive because they imply the economy is getting better. But it won’t always be that way. Later in 2017, inflation will be a real threat. 

Durable goods orders increased a better than expected 2.0% in January vs. December levels. On a year-over-year basis durable goods orders are up 1.6%, and that is mediocre at best. Businesses have not done much investing since oil starting plunging in mid-2014. Most of the growth in orders we’ve seen recently is due to aircraft (both military and commercial). But there are signs of a nascent recovery. New orders for capital goods excluding defense & aircraft accelerated to 2.6% y/y growth. That’s the highest growth rate since the fall of 2014. 

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