May 23, 2017

Stocks opened higher yet again this morning (Dow +48 pts; SPX +.27%). In fact, the Dow is back to within 230 points of its all-time high. Ten of eleven major market sectors are higher in early trading, led by defensives like healthcare, consumer staples and utilities. Semiconductors, retailers and gold miners are lower on the day. The VIX Index is back down to 10.6 and VIX futures are up around 12.2. The dollar is unchanged on the day and commodities are mostly lower. WTI crude oil is trading up toward $51.30/barrel. Bonds are mostly unchanged. The 5-year Treasury yield is hovering around 1.80% and the 10-year Treasury is at 2.25%. At these yields, it’s hard to argue for a lot of opportunity in fixed income investing.

New home sales fell 11% in April to an annualized rate of 569,000 units. The percentage decline was far worse than economists expected, and some headlines look pretty dire. But part of that resulted from an upward revision of March home sales. In addition, keep in mind that home sales hit a “cyclical high” in March. In other words, it’s entirely reasonable that sales momentum would pull back from a 10-year high. The 6-year upward trend in home sales is still intact. The median new home price actually fell 3.8% y/y to $309,200, and for-sale inventory continues to be below long-term averages.  

The White House released its proposed 2018 federal budget. Total federal spending is about $4.2 trillion and tax revenue is far less than that, around $3.6 trillion. Future tax revenue, of course, relies on the Trump Administration’s tax reform plan, which hasn’t been announced yet.  The new proposal calls for government spending cuts of about $3.6 trillion over the next 10 years, and would eventually lead to a balanced budget. For 2018, military spending is mostly unchanged. The big entitlements are mostly the same, except for a substantial slow-down in the growth rate of Medicaid spending, which really exploded with ObamaCare. Federal retirement benefits would be reduced, along with social security disability insurance. And student lending subsidies would be reduced a bit. To be clear, this budget has no hope of passage. Some congressional Republicans have already characterized it as “dead on arrival.” And it is painfully clear that most Americans have no stomach for a balanced federal budget. In fact, in a CNBC interview today, former Senator Alan Simpson lamented the “temples of excess” in government entitlement spending that virtually ensure continued deficits. Spending on healthcare and social security are, everyone agrees, unsustainable. 

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