January 10, 2018

Stocks gapped lower at the open (Dow -40 pts; SPX -.2%). Interest rate sensitive sectors (utilities, real estate, telecoms) are faring the worst because rates are headed higher again today. And that means banks stocks are rising in price. Year-to-date, the KBW Bank Index (BKX) is up 4.4% whereas the SPX is up only 2.6%. The VIX Index is up over 10 this morning and VIX February futures are trading down to 11.7. So not much market volatility expected over the next couple of months. The dollar is weaker and commodities are predictably stronger today. WTI crude oil is up around $63.30/barrel after a lower than expected oil inventory report. That means oil has clawed back to a 3-year high. So are energy stocks back to a 3-year high? Not even close. But the sector is up over 4% in this new year. Bonds are selling off again, with yields moving higher. The 5-year Treasury yield is up around 2.35% and the 10-year gapped up to 2.59%. The yield curve is steepening again, and that’s good news for those bullish on the economy. 

Yesterday, famed bond investor Bill Gross says the bear market in bonds has been confirmed. This brings to an end the long-lived bull market in fixed income that began in 1982. That said, he believes it will be a “mild” bear market and investors won’t lose that much money. Actually, if you look a chart of the iShares 20+ Year Treasury Bond ETF (TLT), it peaked back in the summer of 2016 and has struggled ever since, falling about 10% on a total return basis. 

We got some inflation data this morning. The US Import Price Index decelerated a bit in December to 3.0% y/y growth. The Export Price Index decelerated more, to 2.6% from 3.1% growth. The bottom line is that import & export inflation haven’t picked up in a year, and that certainly won’t encourage the Federal Reserve to accelerate interest rate hikes.   

Interviewed on CNBC this morning, Warren Buffett said, “What has happened in the market has been very sensible.” In other words, the stock market isn’t soaring out of control but is responding positively to a strengthening economy and solid corporate earnings growth. Stocks usually do well in a low interest rate environment, and markets are not richly valued relative to where interest rates are. And, by the way, he says, tax reform makes stock ownership even more attractive. 

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