September 27, 2017

Stocks opened slightly higher this morning (Dow +5 pts; SPX +.11%). Financials, especially banks, and semiconductors are up over 1% in early trading. On the other hand, gold miners, utilities and consumer staples are down about 1%. European markets are poised to close up about .3% today. The dollar is a bit stronger against a basket of foreign currencies and commodities are mixed. WTI crude oil is trading up around $52.13/barrel. We haven’t seen a 52 handle on oil since April. Bonds are selling off today as interest rates tick higher. The 5-year Treasury note yield is back up to 1.90%, a two-month high. The 10-year Treasury note yield is up around 2.29% and the next stop is probably 2.39%. 

Federal Reserve Chair Janet Yellen acknowledged inflation expectations “may have slipped.” And if inflation remains very low, monetary policy may need to be more “accommodative.” She also seemed to admit that the Fed may not completely understand why inflation is so low, and speculated that other factors like globalization or technology may be influencing price levels. The bottom line is that Mrs. Yellen back-peddled on the Fed’s more hawkish statement of last week. The Fed will not charge ahead with monetary tightening if the economy and inflation remain subdued. 

CNBC interviewed Brian Belski of BMO Capital yesterday. His expectation is that the S&P 500 Index will likely rise to between 2,600 and 2,800 by the end of the year. That implies further gains of 4-12% over the next three months and probably qualifies as the most bullish forecast on Wall Street. He believes high-quality US stocks—especially within industrials, tech and financials—will outperform. 

The Trump Administration announced a framework for proposed tax reform legislation today. As for personal income taxes, the current seven brackets are reduced to four (12%, 25%, and 35%, and perhaps one higher rate around 40%). The only personal deductions retained are for mortgage interest and charitable donations. In addition, AMT and estate taxes go away. Finally, the standard deduction is doubled. As for corporate income taxes, the rate would be cut from 35% to 20% or 25%. Democrats wasted no time rejecting the 9-page document out of hand. The ball is now is congress’s court. 

Pending home sales decelerated in August, falling 3.1% from year-ago levels. This index measures the number of home sale contracts signed each month in the US, and it has been in a gradual down-trend since 2015. The National Assn. of Realtors (NAR) now says pending sales this year will be flat with 2016 levels. So headlines are screaming about a “stalled” housing market. NAR’s chief economist had this to say about the report: “August was another month of declining contract activity because of the one-two punch of limited listings and home prices rising far above incomes. Demand continues to overwhelm supply in most of the country, and as a result, many would-be buyers from earlier in the year are still in the market for a home, while others have perhaps decided to temporarily postpone their search.” So when you read panicky articles predicting the imminent demise of the housing market, just remember that demand is outpacing supply. 

Business investment in machinery, computing & communications equipment, and primary metals continued to improve in August. Durable goods orders rebounded from a weak July and rose 5.1% from year-ago levels. A good part of that rebound was due to better aircraft orders at Boeing (BA). But even if you strip out the more lumpy transportation and defense equipment categories, capital goods orders are still up 3.4%.  Bloomberg notes, “The underlying trend in core capital goods shipments and orders has been improving the past few months.” This is important because weak business investment really restrained US economic growth in 2015 and 2016. It looks as though the trend has reversed. 

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