April 10, 2017

Stocks opened higher this morning but quickly turned around. The Dow and SPX are currently flat. Energy is the leading sector, up .9% in early trading. Transports and retailers are also up .5% to 1%. The VIX Index has risen from 11.4 to 13 over the last two weeks. However, VIX May futures aren’t much higher than that, around 13.9. With North Korea back in the headlines, I expected more of a volatility spike. European markets are poised to close down slightly today, but are up 5-6% so far this year. The dollar is flat and oil is headed higher again. WTI crude oil is back to $52.90/barrel, partly due to the US airstrike last week, and partly because the Russian oil minister mentioned the possibility of extending OPEC-led production cuts. Bonds aren’t moving much this morning. The 5-year Treasury yield is hovering around 1.90% and the 10-year Treasury is trading at 2.36%. 

At the end of this month, the government will report first quarter gross domestic product (GDP), generically known as economic growth. Unfortunately, GDP forecasts have been falling.  The Atlanta Federal Reserve Bank’s “GDPNow” forecasting tool now estimates first quarter GDP rose only .6%. That growth estimate was cut in half over the last week, and it’s down from about 2.5% at the end of February. Of course, we know that more lop-sided international trade and less inventory investment by US businesses are causing growth expectations to fall. But it’s also clear that consumer spending is softer. Recent announcements by automakers and traditional retailers make it clear they are suffering. In addition, we’re seeing a drop-off in sales at restaurants. The year-over-year rate of sales growth for food service & drinking places has fallen to .63% from 4.7% at the end of 2016. This is clearly a trend that bears watching.   

Morgan Stanley’s new chief equity strategist just issued a very bullish call for the US stock market. His base case expectation for the S&P 500 Index (SPX) is for a climb to 2,700 over the next 12 months. That implies another 14% upside from here. He says the global business cycle provides a positive backdrop for stocks. And while we are probably in the last stage of the cycle, he says the “end of the cycle is often the best” because rising investor euphoria typically creates a frenzy of buying activity.  

First quarter 2017 earnings season is upon us. The major banks (i.e. Wells Fargo, JP Morgan, Citigroup) will report this week.  

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