March 9, 2017

Stocks opened higher this morning (Dow +39 pts; SPX +.16%). Banks and telecom carriers are leading the way. Energy stocks, on the other hand, are following oil prices lower. The VIX Index, a closely watched gauge of fear among traders, is languishing around 11.7. Most commodities are trading down today. WTI crude oil has fallen below $50/barrel for the first time this year as domestic oil inventories continue to build. Bond prices continue to slide as yields head higher. The 5-year and 10-year Treasury note yields are up to 2.11% and 2.58%, respectively. 

Despite a really low VIX, many traders and equity strategists are calling for a near-term pullback in the stock market. And we have seen some softness over the past week. The SPX is now 1.5% off of its all-time high. Famed investor David Tepper says on one hand, the market has run a lot and “on a multiple basis it’s kind of full.” In other words, the P/E ratio of the SPX is on the high side. On the other hand, we’re seeing synchronized acceleration in global economic growth. So the fundamentals are improving.  

The economy is presenting a bit of a conundrum for economists. That is, while a slew of economic data (i.e. jobs report, consumer & business confidence surveys, consumer spending) have come in better than expected, first quarter GDP (or economic growth) expectations are falling. The Atlanta Federal Reserve’s closely-watched forecast is down to just 1.2% growth from the prior forecast (just a month ago) of 2.7%. CNBC’s survey-based forecast is sitting at 1.5%, slightly slower than the 1.6% we saw in the fourth quarter of 2016. So these forecasts imply that growth is slowing. We know that the widening trade deficit is partly to blame. And it is true that construction spending and industrial production have been soft. But I’m not sure that explains it all. Jim Paulsen of Wells Capital Management says the GDP number “almost seems in left field from a lot of the other data.” CNBC has made much of the fact that since the last recession, first quarter GDP readings have averaged 1.25%--very slow growth. And some reporters and economists are wondering aloud whether there is an error or aberration in the GDP calculation. 

Imports prices jumped 4.6% in February from year-ago levels. That’s the highest inflation rate for imports in five years. Of course, much of that increase is attributable to rising oil prices. If you strip out energy, import prices are up only .8% y/y. Here’s another way to illustrate that point. Prices of imports from Canada (heavy on oil) shot up 16% from year-ago levels, whereas prices of imports from China fell 1.5% over the last year. 

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