September 25, 2017

Stocks opened a bit lower as tensions with North Korea escalated over the weekend. The Dow is currently down 90 pts and the SPX is down .47%. Cyclical sectors are down the most (tech -1.6%; materials -.5%; financials -.6%), whereas defensive sectors are faring better (utilities +.3%; consumer staples +.5%). The only exception is energy +.9% as WTI crude oil shot up to $51.50/barrel. Recall that oil was down around $42/barrel just three months ago. Bloomberg reports hedge funds are making bets that oil goes higher in the near term. Gold is trading .6% higher today due also to geopolitical tensions. Wall Street traders are cautioning, however, not to make too much of geopolitical rhetoric. Markets are not in panic mode. Bonds are rising in price, falling in yield today. The 5-year and 10-year Treasury yields backed down to 1.84% and 2.22%, respectively. 

On Saturday, President Trump implied that the North Korean regime could be toppled soon if they don’t back down. At the same time, US bombers staged a show of force east of North Korea in international airspace. North Korea’s foreign minister characterized Mr. Trump’s comments as a declaration of war, and said his country would shoot down any aircraft that violated North Korea’s airspace. This morning, John Harwood of CNBC reported that the national security and foreign relations apparatus is handling the North Korea issue in a measured, constructive way. But “the wildcard in this equation is the behavior of the president himself.”

The end of the third quarter of 2017 is fast approaching and economists are fine-tuning projections for US economic growth. The St. Louis Federal Reserve Bank’s real GDP “Nowcast” model predicts the economy will grow at a 2.8% rate in the third quarter. That forecast is slightly higher than it was a week ago. The Atlanta Fed’s “GDPNow” model, on the other hand, currently forecasts 2.2% growth. Finally, the New York Fed’s “Nowcast” model sees economic growth at just 1.56%. that’s a pretty large spread. The National Assn. of Business Economics (NABE) sees GDP growth at a very healthy 2.8% but also expects the rate of growth to decelerate to around 2.3% in 2018. Most economists don’t believe President Trump’s 3.0% growth target is realistic. 

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