April 20, 2017

Stocks opened higher this morning, reversing yesterday’s losses. The Dow is up 98 pts and the SPX is currently up .57%. Financials, industrials and energy are leading the way. Utilities, telecoms and consumer staples are in the red. So this is a pretty classic risk-on day for capital markets. The VIX Index is down around 14.5. Most commodities are a bit higher in early trading. WTI crude oil is back up over $50.50/barrel. And by the way, the average price of gasoline around the US is $2.41/gallon. That’s about 15% higher than it was a year ago. Bonds are falling in price, higher in yield. The 5-year Treasury yield is back up to 1.77% and the 10-year yield bounced back up to 2.24%. 

There are clearly some signs of caution in the market. Investors have poured about $1bil into gold ETFs over the last couple of weeks. And the more growth-oriented sectors like financials & energy (as well as small-caps) have lagged this month. According to a recent survey by Bank of America Merrill Lynch (“BAML”), 83% of fund managers believes US stocks are overvalued. And managers are shifting exposure to emerging markets and Europe. BAML adds that “the only way stocks still look cheap is relative to bonds.” Separately, the Assn. of Individual Investors also conducts a weekly survey of retail investors, and only 29% of those are bullish on the US stock market over the next six months. 

A good portion of that caution stems from some weaker economic data in the first quarter. The Atlanta Federal Reserve’s economic growth (“GDP”) forecast tool now calls for GDP growth of just .45%. But economist Mark Zandi at Moody’s Analytics is skeptical. He acknowledges the “hard” economic data are weak, but says it’s probably seasonal. The economy isn’t as strong as survey data suggests, but it isn’t as weak as the hard data would suggest, either. 

Bill Nygren at Oakmark Funds was asked about whether he is worried about geopolitical events (i.e. Syria, North Korea). He is not. “Market timing is a fools game, and I don’t think there are reasons to believe the stock market is expensive today.” He is focused more on the long-term, and sees stocks as cheap relative to the bond market. 

First quarter earnings season is in full swing. Int’l Business Machines (IBM) reported a mixed quarter, beating earnings expectations but falling short on sales. The company has now seen 20 straight quarters of declining sales. And because of that, the stock has gone nowhere in six years. IBM is in the middle of a huge transition away from selling tech hardware to selling software and services subscriptions. During the first quarter, sales in the legacy hardware business fell 17%. It looks like the transition will take a while. The stock was down 5% in the wake of the announcement. 

Morgan Stanley (MS) reported an excellent first quarter, exceeding both revenue and earnings forecasts. The firm’s results bested rival Goldman Sachs by a wide margin. Revenue from both investment banking and fixed income trading doubled. Revenue from trading equities fell 2%, but that was better than Goldman’s -7%. The stock rose 2% yesterday and is up another .6% today. 

American Express (AXP) reported a strong quarter, bouncing back from last year’s loss of Costco business. Revenue fell 2.5% y/y but that was better than Wall Street analysts were forecasting. The company established a new credit card rewards program that boosted business in the quarter. The stock is up 4.7% this morning. 

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