July 31, 2017

Stocks opened modestly higher this morning (Dow +72 pts; SPX flat). Banks are up .7%; defense contractors & a few other industrials are up as well. Utilities & telecoms are trading slightly higher. On the other hand, real estate, technology and consumer related sectors are lower. The VIX Index spiked 3% to 10.6 and VIX August futures are trading up around 11.5. Commodities are mixed. WTI crude oil is trading down 1% to $49.25/barrel, but that’s still near the upper end of the range we’ve seen this year. Most analysts are saying oil will remain range-bound between $40 and $50. Bonds are largely unchanged today. The 10-year Treasury yield is hovering around 2.29%. 

Pending home sales reawakened in June, climbing 1.5% from prior month levels. On a year-over-year basis, June pending sales are up .7%, matching May’s growth rate. Overall, the volume of pending sales for the first half of 2017 are flat with 2016. One big reason why: inventory of for-sale homes is down 7% y/y. There are not enough homes to meet demand, and that’s pushing up home prices to the point that some would-be first-time home buyers are priced out of the market. However, the key drivers for continued growth in the housing market are still in place: low mortgage rates and a strong job market. 

Second quarter US economic growth (gross domestic product) grew 2.6%, bouncing back nicely from very anemic first quarter growth. Consumer spending rose 2.8%, which is healthy. And business investment finally picked up, rising 2.0%. Government spending, which has been a drag in recent memory, edged up .07%. CNBC reports Wall Street economists currently estimate third quarter GDP growth in the mid-2% range. Economist Mark Zandi says we should expect GDP to remain at about 2% per year for the foreseeable future. He notes that typically, once the economy reaches full employment, the average length of time until the next recession is about three years. That’s because the job market usually continues to tighten past full employment, and wage inflation starts to really accelerate. That sparks broad inflation throughout the economy, forcing the Federal Reserve to raise rates more aggressively. Eventually, that tends to choke off growth and results in economic recession.  

Intel (INTC) reported strong second quarter results, with 9% revenue growth and 22% earnings per share growth. Management said it sees improving personal computer sales this year. In addition, server chip sales rose 9% and the company’s Internet of Things division saw sales explode 26% higher. Management raised its earnings guidance for the second half of the year. Immediately after the report, Wall Street analysts began raising 2017 and 2018 earnings forecasts for the company. The is up about 1.2% since the announcement. 

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