September 28, 2017

Stocks gapped down at the open but quickly recovered. The Dow is currently up 22 pts and the SPX is flat. Transports, semiconductors, pharma and gold miners are trading higher, but banks and retailers are giving back some of their recent gains. By the way, the SPX is poised to achieve its eight consecutive quarterly gain. European markets are up slightly in today’s session after a survey of economic confidence gave investors a positive surprise. Most of Asia was higher overnight. The dollar is weaker today and WTI crude oil is up again to trade around $52.30/barrel. Bonds continue to sell off as yields march higher. The 5-year Treasury yield is up around 1.92% and in the near term it could move up to test resistance at 1.96%. The 10-year Treasury yield is up around 2.33% and will likely test 2.40% in the near future. 

Southwest Airlines (LUV) announced that recent natural disasters will cost the company about $100mil. Roughly 5,000 flights were canceled mainly due to Hurricanes Harvey and Irma. This is not a surprise for investors, as both United Continental (UAL) and American Airlines (AAL) recently issued profit warnings. Whereas Southwest achieved 7% profit growth last year, analysts now expect profits to decline 2% this year. Clearly, airline stocks have been volatile this year, but importantly, their stock prices have actually kept pace with the S&P 500 Index. 

We got the final revision for second quarter US gross domestic product (GDP). The economy grew a very healthy 3.1% on the back of a 3% rise in consumer spending. Business investment also added to growth. In addition, inflation remained very tame. The data shows that the economy was in good shape before hurricane-related disruptions. Economists expect third quarter GDP to be in the range of 2-2.5%. 

Initial filings for unemployment insurance (“Jobless Claims”) recently spiked, probably due to the hurricanes. The effect will be temporary. Economists watch this data closely as a gauge of economic momentum. Jobless claims have been in a steady down-trend since early 2009 and continue to hover around multi-decade lows. To give some perspective, average weekly claims at the height of the Great Recession were about 650,000. Now we’re seeing numbers in the range of 230,000 to 270,000.
 


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