March 7, 2017

Stocks opened lower but quickly recovered. The Dow and SPX are now flat and down .1%, respectively. Tech is the best-performing sector, up .4%, thanks to semiconductors. Most other major groups—gold miners, biotechs, retailers, transpors, banks, energy producers—are flat to down in early trading. The VIX Index is hovering around 11.3. The dollar is slightly stronger on the day and commodities are mostly lower. They deserve a breather after a pretty strong run. Copper and gold are up 4-6% so far this year; iron ore is up 19%; the iShares Global Agricultural Producers ETF (VEGI) is up 4%. WTI crude oil has been very stable above $52/barrel so far in 2017. 

Bonds are mostly lower in price again, higher in yield. The 5- and 10-year Treasury yields are up to 2.04% and 2.51%, respectively. The 1-year high yield for the 10-year is 2.6%. Not surprisingly, the more interest rate sensitive sectors (utilities, real estate) are down today. It does appear very likely now that the Federal Reserve will raise its short-term policy interest rate later this month. Another quarter-point hike would put the overnight target rate at .75% to 1.0%. 

RBC Capital Markets says although home prices continue to rise, affordability is actually improving relative to the alternative—renting. The ratio of median monthly mortgage costs to median monthly rents is 1.4 times. The 20-year average ratio is about 2. So historically, the option to buy is relatively attractive. 

The US trade deficit rose to -$48.5bil in January, the highest since March 2012. The growth of imports into the US continues to exceed the growth in exports to other countries. Specifically, imports are accelerating for consumer goods, capital equipment and autos. We know that a stronger US dollar tends to make our exports less price-competitive overseas, and it also makes imports seem cheaper. Further, widening trade deficits detract from gross domestic product (GDP). Bloomberg says this subtracted 1.7 percentage points from GDP in the fourth quarter of 2016. That’s a rather large impact, and makes us wonder if President Trump’s 3% GDP growth goal is realistic. 

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