June 7, 2017

Stocks opened higher but quickly went flat (Dow +10 pts; SPX +.06%). Banks and semiconductors are leading the way (+1%); biotechs & retailers are also up modestly. Energy stocks are dragging. The VIX Index is down around 10.2. Over the last couple of trading sessions, the SPX and Dow have broken out to new highs. The dollar is a bit stronger today and so most commodities are lower. WTI crude oil just slipped 3.5% to trade around $46.50/barrel after a report showing higher US oil stockpiles. This is what turned the stock market around. Gold, copper and iron ore are down today as well. Bonds are slightly higher in price, lower in yield. The 10-year Treasury yield is down around 2.15%, the lowest since November 10th. It looks to me like that yield is sitting right on trendline support.

European markets are poised to close modestly higher as traders bet that despite stronger economic growth in Europe, the European Central Bank won’t strike a hawkish tone when it meets tomorrow. Famed economist Mohamed El-Erian notes “financial conditions overall have eased considerably, both in Europe and in the rest of the world.” In addition, he says forward-looking economic indicators “point to further growth acceleration…”

Despite the low and stable VIX, short-term stock traders seem increasingly nervous. Art Cashin of UBS addressed the dichotomy between rising stocks and falling bond yields. He noted “some signs that the economy is not quite as robust as people thought,” and economic growth may even be slipping below 2%. He also mentioned some traders think the 10-year Treasury yield may deip below 2% in the near future. According to Bloomberg, most economists forecast gross domestic product (GDP) growth of 2.2% this year.

Goldman Sachs’ David Kostin says the FANG stocks—Facebook, Apple & Amazon, Netflix, Google (or “Alphabet”)—will continue to run even if US economic growth doesn’t accelerate this year. Keep in mind these stocks are all up over 25% so far this year. Mr. Kostin says investors are looking for secular growth and these stocks fit the bill. In today’s market, “growth is still relatively scarce,” so companies with sustained double-digit revenue growth are in the “sweet spot that we look for.”

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