June 20, 2017

Stocks opened lower this morning after achieving fresh all-time highs yesterday. The Dow is currently flat and the SPX is down .4%. The energy sector is down over 1.5% in early trading as oil prices continue to fall. In addition, telecoms and transports are down 1%. The VIX Index is hovering around 10.5 and VIX July futures are trading around 12.2. The dollar is stronger on the day and most commodities are weaker. The dollar has been sliding since the beginning of the year, but has staged a small come-back over the last two weeks. As mentioned, WTI crude oil is down under $43/barrel, the lowest since August 2016. That is clearly spooking the stock market. But bonds are barely moving this morning. The 5-year Treasury yield is hovering around 1.78% and the 10-year yield is trading at 2.17%. 

Bloomberg ran an article today positing that the stock market rally’s “theme song” should be “just buy the dip.” Clearly, that has been the right strategy for years now. But lately (that is, since Brexit) corrections have been hard to come by. And with the slow death of the Trump Rally, is this still a valid strategy? Cameron Crise at Bloomberg says yes, it is. In fact, he believes “market fundamentals are stronger now than they were a few months ago.” He points out that stocks look even more attractive vs. bonds. The real (inflation adjusted) earnings yield on the S&P 500 is about 2.7% whereas the yield on the 10-year Treasury bond is only 2.17%. 

CNBC interviewed Federal Reserve Bank of Chicago President Charles Evans today. In his view, US economic “fundamentals are really quite good” with “above trend growth.” Labor force growth plus productivity growth, which essentially equals total economic growth, should be about 1.75%. That doesn’t sound like a lot. Economic growth is clearly lower than it was in past cycles (i.e. the 1980s). But Mr. Evans isn’t spooked. He suggested that monetary policy normalization will continue apace. We’re “probably pretty close to the point where we start running down the [Fed’s] balance sheet.” 
Treasury Secretary Steven Mnuchin says the Trump Administration is confident it can push through a “massive” tax reform bill this year. He says it is his number one priority and teams are meeting daily to prepare. The plan, of course, will include an incentive for US multi-national companies to bring home cash held overseas. And it will, as we expect, focus on lower rates along with some simplification of the tax code. 

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