January 23, 2018

Stocks opened modestly higher this morning (Dow +15 pts; SPX +.25%). There’s no real pattern among the eleven market sectors. Tech is up .7% and consumer discretionary is up .5%. But the rest of the cyclicals (energy, financials, materials) are down. And the most interest rate sensitive sectors—utilities, real estate—are up over 1% in early trading. The VIX Index is up around 11.4. It has been over 11 for about a week now. But February VIX futures aren’t much higher at 11.9. So expected volatility is still pretty low. The dollar is weaker this morning and commodities are mostly higher. WTI crude oil up around $64.58/barrel. Bonds yields are ticking lower after a huge run-up since September. The 5-year and 10-year US Treasury note yields are trading at 2.42% and 2.62%, respectively.

I thought I’d give you a sampling of opinions from big-name institutional investors this morning:

Ray Dalio of Bridgewater Associates says we are in the latter part of the business cycle but he doesn’t see the end in sight. “We are in this Goldilocks period…inflation isn’t a problem…growth is good.” He predicts a “market blow-off,” meaning further upside in stocks, because there is so much cash—in banks, on corporate balance sheets, in investors’ brokerage accounts—that wants to be invested. “We are going to be inundated with cash.” Mr. Dalio’s primary concern, however, is that the Federal Reserve will force stock prices lower if its raises interest rates too fast. He predicts a market downturn in about two years.  

Jim Paulsen of the Leuthold Group, says we are in for a “fairly significant correction” later this year. Probably 10-15%. Investors are ignoring the negatives and with new-found optimism they’re “bidding up valuations too high.” Critically, he doesn’t foresee an economic recession, believing that improved economic growth around the world and pro-growth fiscal policy here in the US should sustain the rally. Therefore, the upcoming correction should be “a whale of a buying opportunity.” 

Famed bank analyst Dick Bove, who was bearish on bank stocks last year, now says some important changes are creating “Nirvana” for the industry. He cites tax reform, tighter monetary policy, loosening Fed regulations, and advances in technology that are making the banking business more efficient. These factors will all improve bank profitability. “They are about to do very well for a long, long time. The only impediment that could derail this outlook is an economic recession and this does not look likely at the present time.” 

CNBC Contributor Jim Cramer, says he’s never seen a market like this. There seems to be a shortage of stock shares for sale. In other words, there’s a shortage of sellers, which he attributes to FOMO—fear of missing out. And this isn’t limited to individual investors, but also extends to institutional investors. Everyone is eager to put cash to work, and he thinks this will continue for a while. 

Scott Clemens Of Brown Brothers Harriman says he doesn’t forecast an economic downturn in the next couple of years. “The primary driver of this economy is personal consumption. When you look at the strength of the labor market, the strength of the housing market, layer a couple of tax reform benefits on top of that, there’s still fuel in the tank for the consumer. That’s 70% of GDP.”  

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