August 29, 2017

Stocks gapped down at the open but quickly recovered. The Dow and SPX are currently up 12 points and flat, respectively. Banks, retailers and energy companies are down the most in early trading. On the other hand, gold miners and consumer-related sectors are trading higher. The VIX Index is back up over 12 and gold is at its highest price of the year. Yesterday, North Korea conducted another missile test, this time violating Japan’s airspace. President Trump responded by saying, “all options are open” for retaliation, but Asian stock markets were down only about .2% last night. So investors clearly aren’t panicking. WTI crude oil, which typically spikes on geopolitical tension, is down a bit to trade around $46/barrel. Bonds, however, are trading higher on the news. The 5- and 10-year Treasury yields sank to 1.69% and 2.11%, respectively, the lowest levels since Nov. 2016. 

Japanese investment research firm Nomura says North Korean tensions “remain contained.” So far, there is no sign that the US military is responding. Normura lists the typical signs of preparation: evacuating US citizens on the Korean peninsula, building up military forces on the border of North & South Korea, upgrading US defense readiness condition from 3 to 4. None of these has happened yet. Finally, Nomura reminds us that we’ve been in this situation before. In 1994 President Clinton considered air strikes against North Korean nuclear research facilities. 

US consumer confidence improved to 122.9 in August, the second-highest index level since 2000. The Conference Board’s survey of consumer attitudes found that consumers’ assessment of the current business environment is improving, and fewer reported that jobs are “hard to get.” We’ll see if this translates to stronger consumer spending in the coming months. 

The S&P Case-Shiller Home Price Index rose 5.77% y/y in June. That’s a little higher than expected, and in fact the growth in home prices has been accelerating gradually over the past year. We all know that housing demand is being driven by a strong job market and low mortgage rates. But another big reason for price appreciation is a shortage of homes for sale.

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