May 3, 2017

Stocks opened this morning (Dow -65 pts; SPX -.35%). Nine of eleven sectors are lower in early trading, led by real estate and materials (down 1%). Banks are one of the few groups trading up at the moment. The dollar is a bit stronger and commodities are lower. That probably has something to do with the Fed policy meeting today. We’ll get an announcement around 2pm EST. WTI crude oil opened down .5% but quickly turned around and is now up .5% to $47.70/barrel. Bonds are mostly unchanged this morning. The 5-year Treasury yield is 1.83% and the 10-year is trading at 2.29%. With the move in the dollar and real estate, one would think bond yields would be higher. Anyway, given the soft economic data we’ve had over the past six weeks, it’s surprising capital markets would be moving as if they expect a hawkish announcement from the Fed today.

About 350 of the S&P 500 companies have now reported first quarter results. So far, aggregate corporate earnings are on track to grow about 14% from year-ago levels. Tom Lee of Fundstrat Global Advisors points out that several sectors posting the best first quarter earnings growth haven’t been leading the stock market. Energy, financials and materials sectors are all on pace for earnings growth above 19%. And yet energy stocks as a group are down 10% so far this year, financials are up a mere 2% and materials stocks are matching the S&P 500’s total return of 7.4%. The bank stocks, he says, are falling because interest rates declined over the last month. Likewise, energy stocks aren’t tracking earnings, but rather the price of oil, which is down over the last month. Short-term fluctuation in rates and oil can cause temporary “disconnects” in the stock market. The real question is, how quickly can the economy rebound from recent weakness? The economy will drive rates and oil. 

Speaking of the economy, the ISM Non-Manufacturing Index accelerated to 57.5 in April vs. 55.8 in the prior month. The increase in service sector business activity was not anticipated by economists. This is the second-highest level since October 2015. More importantly, the forward-looking “new orders” component of the index shot up to 63.2, the highest since August 2005. Other components like backlogs and exports also improved. Bloomberg notes the “results are in sync with projections for a rebound in economic growth this quarter coming off the weakest pace in three years, which was partly due to transitory restraints.” 

Apple (AAPL) reported first quarter results that disappointed analysts. Revenue rose 5% y/y and earnings rose 10% y/y. The CEO, Tim Cook, said consumers delayed new purchases of iPhones because they’re anticipating new Apple products that are rumored to be released soon. This is sort of a stretch, since Apple nearly always introduces new products in the fall.  Anyway, none of this matters. The stock is down a scant 1% from its all-time high and that should tell you what you need to know. By the way,  services revenue (from aps, iTunes, Apple Music, CarPlay, Apple Pay) is growing quickly and now represents 18% of the company’s total revenue. 

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