May 25, 2017

Stocks opened higher again today (Dow +85 pts; SPX +.48%). The Dow is back over 21,000 and the SPX just touched a new intraday high. Ten of eleven major market sectors are in the green, led by consumer discretionary, tech and real estate. Asian markets were up sharply overnight (Shanghai Composite +1.4%) “amid speculation that Chinese state-backed funds were active in the market,” according to Bloomberg. That means the state is directing large investment funds to buy stock, probably as a response to Moody’s credit rating downgrade of Chinese sovereign debt. In other words, it’s just window dressing. The dollar is slightly higher today, and commodities are lower. WTI crude oil is trading down to $50.80/barrel. OPEC oil ministers are meeting in Vienna to consider an extension of their oil output freeze agreement. It will likely pass. Bonds are mostly unchanged. The 5- and 10-year Treasury yields are hovering around 1.79% and 2.26%, respectively. Remember, the trading range for the 10-year is 2.2% to 2.6%. There’s nothing to see here until it breaks out of that range. 

The Federal Reserve released the minutes from its last policy meeting yesterday. It was a non-event. A few Fed governors were ready to raise interest rates again, but most preferred patience for now. They would like more evidence that recent weakness in economic growth is temporary before moving rates again. There was one interesting discussion regarding a proposed plan to begin reducing the Fed’s $4.5 trillion balance sheet. That is, all those bonds the Fed bought as part of its quantitative easing program will eventually be sold or allowed to mature without reinvestment. The plan calls for selling caps in order to ensure balance sheet reduction is somewhat predictable and gradual. Note that any selling activity will put upward pressure on interest rates. 

CNBC absolutely freaked out yesterday when it caught wind of Yale Professor Robert Schiller’s view that the stock market could possibly rise another 50% over the next 10 years. Whipping up a media frenzy, the news anchor called him a “market guru” and gushed about this “stunning call…jaw-dropping!” The interview was, however, laughably boring as he explained his view. Mr. Schiller believes that stocks are “highly priced,” but the market is not dramatically overvalued. And stocks are still a much better value than bonds. He explained that during the dot-com bust, valuations reached ridiculous levels and if you assign that value to today’s market, stocks would be about 50% higher. But this clearly is not his prediction and that outcome is “not likely,” he said. The stock market “could go up a lot…[and] could go down a lot.” But “ten percent, or twenty percent is more reasonable” from here. So Mr. Schiller failed to deliver the hoped-for excitement. By the way, it is reasonable to assume the US stock market will advance an average of 5% per year for the next 10 years. It can do so without reaching ridiculous valuation levels because corporate earnings should advance at about the same rate. 
 


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