August 18, 2017

Stocks opened lower again today (Dow -40 pts; SPX -.3%). Gold miners and utilities are modestly higher, but most everything else is in the red. Real estate and telecom sectors are down .9%. Yesterday, the VIX Index spiked to 15.5 but today is back down under 15. VIX September futures are also around 15. CNBC points out that we’re not yet seeing a large selloff on big volume and that could be a sign of stability. In fact, a lot of professional investors are on vacation and exchange volume is very light. The dollar is weaker and commodities are mixed today. WTI crude oil is trading slightly lower to $46.95/barrel. Bonds are trading mostly higher in price, lower in yield. The 10-year Treasury yield is back down to 2.18%. And remember, at the beginning of the year the 10-year yield was near 2.5%. Since then, falling inflation expectations have resulted in lower yields. Alan Blinder, former Federal Reserve official, characterizes the dip in inflation this year as “mysterious.” Six months ago we had stable inflation, and now we’re seeing falling inflation. “What in the world happened?” He implied our methods for measuring economic activity may be flawed. 

Yesterday on his show Mad Money, Jim Cramer said much of the selling we’re seeing is seasonal. “The calendar, and the weak-handed momentum shareholders that have gone along for the ride, have coalesced to produce a wave of selling, that the Washington craziness has tapped into.” In other words, politics is not the proximate cause of recent stock market volatility but it's a handy scapegoat. I’d note as well that Brexit (June 2016) was the last time we had a 5% stock market correction. So we’re due.  

Footlocker (FL) reported very disappointing second quarter results, with a 34% year-over-year decline in earnings per share. The retailer’s same-store-sales growth fell more than 5%, the first decline since 2010. The CEO said, “We certainly didn’t see the business dropping off as much as it did.” Accordingly, he offered a bleak outlook for the rest of the year and said he expects sales to decline further. Bloomberg points out that other retailers like Under Armor (UA) and Dick’s Sporting Goods (DKS) recently disappointed investors as well. Anyway, FL stock is down 25% today and damage is spreading to competitors (i.e. Nike -4.5%). 

BMO’s chief investment officer made an interesting point today. He believes the stock market is not factoring in the expectation for federal tax reform. As evidence, he says small-cap stocks have underperformed this year, and they would clearly benefit disproportionately from corporate tax cuts. In fact, the Russell 2000 Index is flat this year compared with the S&P 500 Index up nearly 10%. He says no one believes the Trump Administration will be able to push through tax reform. 

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