Stocks opened lower this morning, digesting the prior week’s gains. The Dow is down 22 pts and the SPX is off .1%. Banks, semiconductors and energy stocks are leading the indices lower. The VIX Index just dropped under 10, right around the lowest level in at least 10 years. VIX June futures are trading under 12 this morning. So an apparent lack of concern (“complacency”) among traders is a bit of a concern. The dollar is modestly stronger today, yet most commodities are a bit higher. WTI crude oil is up .5% to trade around $49/barrel. Oil prices fell sharply yesterday even as OPEC pledged to extend its oil production freeze. Investors were hoping the cartel would agree to deeper cuts. Bonds are trading slightly higher. The 5- and 10-year Treasury yields are hovering around 1.79% and 2.25%, respectively. And by the way, the average 30-year fixed mortgage rate is currently 3.95%.
We’re hearing a lot of chatter lately about the FANG stocks (Facebook, Apple & Amazon, Netflix, Google). Investors have piled into them because these companies are growing earnings very rapidly (at least 20% y/y). So the stocks are all up at least 25% this year. CNBC points out that the 5 top performing stocks in the S&P 500 Index (Amazon, Apple, Google, Microsoft, Facebook) account for 30% of 2017’s market gains. And the top 15 performers in the S&P 500 account for half of those gains.
First quarter economic growth—gross domestic product, or “GDP”—was revised up to 1.2% from the initial reading of .7%. The revision was driven by better consumer spending (.6% vs. .3%) and an acceleration in business spending. This is welcome news, since we know the economy hit a lull in early 2017. As a reminder, one of the big reasons GDP was weak is that businesses were drawing down inventories. That is a normal and temporary condition, and it is a positive for future quarters when inventories must be replenished.
Durable goods orders were a bit weak in April. Orders for new equipment fell .7% from prior month levels. That’s the headline, but it’s also the least important piece of information in the report. Here’s what matters: business investment in new capital goods (excluding aircraft & defense equipment) decelerated to 1.6% y/y growth from 2.8% in March. So that’s a pretty slow rate of growth in new orders. But it’s also at the higher end of what we’ve seen in the last two years. Overall, the report is a very modest negative for the economy.
Speaking of the economy, the Citigroup Economic Surprise Index has plummeted from +58 to -38 in the past two months. That means economic data is coming in below economists’ expectations pretty much across the board. This is why the Federal Reserve won’t seriously consider raising interest rates until June, assuming conditions improve as expected.