June 1, 2017

Stocks opened higher this morning (Dow +50 pts; SPX +.4%). The cyclical sectors (materials, energy, financials, industrials, consumer discretionary) are leading the way. Biotechs are up 1.4% in early trading, and the retailers and transports are up .3% to .5%. The dollar is a bit stronger against a basket of foreign currencies, and most commodities are trading lower. WTI crude oil is up a bit to $49.10/barrel. Bonds are mostly unchanged. The 5-year Treasury yield is hovering around 1.76% and the 10-year is trading at 2.22%. Economist Mohamed El-Erian of Allianz says the market has priced in a 90% chance that the Federal Reserve will hike interest rates when it meets later this month.  

Payroll processor ADP says the US economy generated 253,000 new jobs in the month of May. Economists were expecting something closer to 180,000, so this is a big surprise. Small and mid-size businesses were responsible for the bulk of job growth. Payrolls increased by 88,000 in professional & business services, 58,000 in trade & transportation, 54,000 in education & health services, and 37,000 in construction. Economist Mark Zandi says this clearly suggests the unemployment rate is headed down to 4%.  This report is considered a preliminary look at monthly job market trends, and the final word is the Bureau of Labor Statistics’ Employment Situation Report, due out Friday. 

Palo Alto Networks (PANW) reported quarterly results that handily beat Wall Street analysts’ projections. Total revenue rose 25% y/y and earnings per share climbed 45%. Management successfully restructured its sales force and got back on track. Product sales were strong and the company added the highest number of new customers in its history. The stock is up 17% this morning. 

Earlier this week, CNBC interviewed famed hedge fund manager Lee Cooperman. He has a constructive market outlook. He says the stock market looks somewhat fully priced but is still a much better value than the bond market. The P/E multiple on the S&P 500 is “reasonable,” and the market has upside if the Trump Administration can push through some of its pro-growth policies. That said, investors don’t expect anything on that front in 2017. Mr. Cooperman notes that none of the usual signs of a bear market—investor euphoria, a hostile Federal Reserve, oncoming economic recession—are present in this market. This is not a time to be fearful. When asked what to watch out for, he said that a tightening labor market could lead to higher inflation, which would cause the Fed to tighten quicker. 

CNBC also interviewed strategist Tom Lee of Fundstrat Global, who said investors are “overly pessimistic” on oil. Oil prices have fallen to $48/barrel from nearly $54/barrel at the beginning of the year. His research suggests the oil market is coming more into balance (that is, supply and demand balance) and notes a weaker US dollar could also help oil prices turn around. He also addressed the narrowness of the stock market rally this year. In other words, the rally has been driven by very few stocks. The tech sector + other FANG stocks like Amazon (AMZN) are responsible for 65% of the year’s stock market gains. He likens this environment to 2015, a period when owning FANG stocks was the only way to make money. Jim Cramer of CNBC’s Mad Money disagrees. On his show last night, Mr. Cramer gave a list of stocks outside the FANG group that are currently at or near their all-time highs: 3M (MMM), Boeing (BA), Raytheon (TRN), General Dynamics (GD), CSX Corp. (CSX), Costco (COST), Hasbro (HAS), McDonald’s (MCD), Baxter (BAX), Becton Dickenson (BDX), Starbucks (SBUX), Carnival Cruise (CCL), Ulta Salon (ULTA), and Roper (ROP). I would also add Lockheed Martin (LMT), Honeywell (HON), Constellation Brands (STZ), Reynolds American (RAI) and Johnson & Johnson (JNJ). 

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