November 1, 2018

The major stock market averages opened higher this morning after a Tweet by President Trump saying he has re-engaged China’s president regarding trade tensions. The Dow is currently up 227 pts and the SPX is up .7%. Most sectors are rising, led by materials (+3%), and industrials (+1.5%). Those two groups are viewed as having the most sensitivity to trade tariffs. The only sectors not participating in today’s rally are utilities and communications services. European stock markets will close flat to slightly down today, whereas China was up overnight. The VIX Index fell back under 20, a level considered to be the dividing line between normal and elevated fear among traders. The US dollar fell .8% this morning on hopes that the US and China will somehow resolve trade tensions, but also because the Bank of England signaled a faster pace of interest rate hikes going forward. That weaker dollar is helping stocks to float upward, but also pushing commodities higher. The Bloomberg Commodity Index is up .3% today (but still down 5% on the year). However, WTI crude oil fell again to trade just under $64/barrel. Oil has surprised everyone this month. While stocks have begun to recover from their October correction, oil has continued to fall, losing $11/barrel in the month. We note reports that Russia has boosted oil output. Bonds are trading modestly higher today. The 5-year and 10-year Treasury yields ticked down to 2.97% and 3.15%, respectively.

I’d like to highlight two key earnings announcements today. First, DowDuPont (DWDP) reported an excellent quarter with 10% year-over-year sales growth and 35% earnings growth. Two areas widely thought to be weak—China and autos—turned out to be rather strong. Sales from China rose 18% and sales of products to automakers rose 10%. In addition, the CEO raised his estimate of the cost savings resulting from Dow Chemical’s merger with DuPont. The company plans to spend $3bil buying back stock shares before April. This is all good news. The stock is up 8% today after having fallen 30% since January. This is a classic case of the pendulum swinging too far in terms of the market pricing in risk. Second, NXP Semiconductor (NXPI) reported better-than-feared results today and investors are breathing a sigh of relief. NXP makes semiconductors used in autos, and the company warned that product orders are slowing. But critically, management’s forward guidance wasn’t terrible and the business isn’t falling off a cliff. Here again, with the stock having fallen more than 40% since February, it’s clear that investors over-reacted. These two earnings reports are critical because they imply strongly that chemicals, autos and semiconductors are over-sold.


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