August 3, 2017

The major stock market averages pulled back this morning (Dow flat; SPX -.23%). Ten of eleven sectors are in the red, with energy down .9%, materials down .6% and financials down .5%. Consumer staples is the only stand-out, up .3% in early trading. That’s largely due to a rebound in tobacco stocks. Small-caps, by the way, are really lagging large-caps today (and for most of 2017). The dollar is stronger today after the Bank of England cut its economic growth outlook for the UK. Despite dollar strength, WTI crude oil is trading up toward $50/barrel and it hasn’t been there since late May. Bonds are modestly higher in price, lower in yield today. The 5- and 10-year Treasury yields are hovering around 1.80% and 2.24%, respectively. Both of those levels are short-term support levels. Rates have fallen this year, but let’s keep things in perspective—the 10-year yield was just 1.5% a year ago. 

Blackrock’s global chief investment strategist wrote a commentary piece on CNBC this morning titled, “There Is No Reason To Cut And Run In This Market.” First, he acknowledges recent investor trends: stock holding periods are shortening; bond funds have seen more interest than stock funds since the recession; risk-taking is out of favor; investors are more focused on short-term political risks. But despite those trends, long-term investing “still pays. Literally.” And to the extent that investors “play it short and safe” they have lost out on great opportunity. Blackrock’s research “indicates that an investment in global equities is expected to deliver a real return far in excess of holding an investment in cash over the next five years.” Second, he argues us that trying to time the market (in order to avoid any losses) is “counterproductive, and decidedly more difficult and perilous.” Here were are reminded of Brexit. Third, he asserts that investors really need to forget about short-term risks and focus on long-term fundamentals. What are the drivers of growth? The economic cycle, corporate earnings and equity valuations are on solid ground, according to BlackRock’s research.  

Today we got fresh evidence that the labor market is very strong. Both initial and continuing filings for unemployment insurance (i.e. “jobless claims”) are hovering near generational lows. The Challenger job cuts report shows that layoffs are down 38%  y/y. Bloomberg reports employers in most industries are reluctant to let employees go because it’s hard to find qualified replacements. 

ISM’s non-manufacturing index, which measure business activity in the service sector, fell to 53.9 in July vs. 57.4 in June. That’s the lowest reading since last August and indicates that the pace of business expansion slowed significantly in the month. Services, rather than manufacturing, make up the lion’s share of our economy. This could be a temporary, seasonal trend but it bears watching. 

Nationwide orders for factory goods rebounded strongly in June, but strength was driven entirely by lumpy aircraft orders. A key subset of factory orders, capital goods orders excluding aircraft and defense equipment, rose 4.7% from year-ago levels. And that’s really what we should be looking at because that measure comes pretty close to estimating the degree to which US businesses are investing in growth. A year ago, capital goods orders were down 6.6% y/y, so while the rebound has been a bit uneven, business investment is significantly better than it has been over the last three years. 

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