June 22, 2017

Stocks opened higher this morning, led by healthcare. The Dow is up 29 pts and the SPX is up .2%. The Nasdaq Biotech Index is surging 1.9% at the moment. Remember, biotechs severely under-performed the overall stock market last year and until a week ago the group was about even with the S&P 500 for 2017. So over the last few trading sessions we’ve seen significant fund flows into this area. On the other hand, both financials and energy are lagging today. The VIX Index is down around 10.4, and has been trading around this level for the past two months. Most commodities are lower today (and year-to-date). WTI crude oil is trading a bit higher this morning, around $42.80/barrel. Stocks will continue to be very sensitive to oil prices, which have fallen back to levels not seen since last August. Just about every Wall Street trader is trying to guess at the bottom for crude. Bonds are mostly unchanged today. The 5-year Treasury yield is hovering around 1.76% and the 10-year Treasury is languishing around 2.15%. 

A couple of days ago, economist David Rosenberg in a CNBC interview said the stock market is in “denial” about some key macro risks. He said the economy is underperforming expectations, citing weaker auto & restaurant sales, housing starts, and industrial production. He also said the bond market’s falling yields are to be taken as a signal that macro risks are rising. He believes that “more often than not,” the bond market gets things right. But a lot of investors and investment strategists disagree and instead assert that bond yields are not necessarily representative of the true state of the economy. They say very low bond yields are a result of 1) loose central bank monetary policy all around the world, 2) foreigners buying up Treasury bonds because their own sovereign bonds don’t offer attractive yields, and 3) temporary US economic weakness in the first quarter, which has become commonplace in recent years. Finally, they point out that corporate earnings have rebounded strongly over the past couple of quarters. And over the long term, growth in corporate earnings is really what drives the stock market.  

CNBC’s “Mad Money” host Jim Cramer recently addressed the disconnect between the bond and stock markets. He said the bond market is actually bigger than the stock market in terms of dollars, so you can’t ignore it. However, bond buyers are currently preoccupied with the drop in oil prices, which they interpret as evidence of an economic slowdown. He says this is hyperbole. Falling oil prices have resulted from rising US oil production, not from falling global demand. He believes that oil prices are close to a bottom. Therefore, this is not the time to throw in the towel on the stock market. 
The Index of Leading US Economic Indicators (LEI) rose by .3% in the month of May, even with economists’ expectations. This index is a combination of different economic data that attempt to predict how well the economy will perform over the next six months. It has shown modest improvement in each month of 2017. If you look at the chart on a year-over-year basis, things look even more encouraging. LEI declined steadily from mid-2014 to mid-2016, when it suggested zero percent improvement in the economic outlook. But since then it has since staged a recovery to +3.5%. the bottom line is that LEI does not suggest the economy will crash over the next six months.   

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