June 26, 2017

The major stock market averages climbed briefly at the open, but quickly turned around. The Dow is up 40 pts, the SPX is up .2% and the Nasdaq is flat. “Waffling” has become a consistent pattern throughout June, according to CNBC’s Jim Cramer. “The market can’t make up its mind.” In addition, we’re seeing huge dispersion of returns from sector to sector, and from stock to stock.  For example, healthcare is screaming higher (+6%) this month, while energy has sagged .5%. And even within the energy sector, Chevron (CVX) is up 1.3% this month but Schlumberger (SLB) is down 5%. Mr. Cramer rightly points out that “nothing is trading in unison.” The VIX Index continues to trade near record lows (below 10 today), but while the SPX looks like it is simply treading water, there is a lot going on under the hood. 

WTI crude oil is trading up around $43.40/barrel and is clearly trying to bottom. That is a good thing. Other commodities haven’t fared well either lately. Gold, iron ore, and the S&P Fertilizers & Agricultural Chemicals Index (STFERT) are all down in June. Bonds, meanwhile, are trading up as yields fall. The shorter-term 5-year Treasury yield has gone nowhere in June, hovering around 1.75%. But the longer-term 10-year Treasury yield is down around 2.13%. 

Economic strength is clearly under debate by investors. Citigroup’s US Economic Surprise Index plummeted from +60 to -78 over the past three months. That means all sorts of economic data are coming in worse than economist forecasts. Today, we learned that durable goods orders (that is, business orders for equipment meant to last more than 3 years) fell 1.1% in May vs. economists’ consensus forecast for -.6%. So that dinged the economic surprise index. But unfortunately, this headline is misleading due to a dip in commercial aircraft orders that dragged down the entire index. But if we instead look at a better measure of US corporate capital spending—“new orders for capital goods ex-defense & aircraft”—and look at it on a year-over-year basis, we see a completely different story. Corporate capital spending has been accelerating since mid-2016 and orders for new equipment rose 6.4% in May. That’s the highest growth rate since September 2014. So this is a good example of how nuanced the game of economic measurement can be. 

And by the way, we’re seeing the same upward trend in industrial production as well as both exports & imports. According to  Tony Dwyer of Canaccord Genuity, the fundamental backdrop remains pretty solid and investor expectations are probably too low. He says investors shouldn’t sell until three things happen: the real Fed-funds interest rate moves above zero, the yield curve inverts, and the Chicago Fed’s National Financial Conditions Index has to be showing stress. None of those three conditions has been met. “You don’t get market peaks until you invert the yield curve, you shut down credit and move into economic recession.” Mr. Dwyer doesn’t foresee another recession for another year-and-a-half or two years. 
 


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