February 14, 2018

The major stock market averages opened lower this morning following a substantial rebound from correction lows. The Dow and SPX are currently flat and +.4%, respectively. The correction, by the way, seems to have been halted at 11.7% (intraday) and 10% (closing). It took only 10 trading sessions to reach the bottom on an intraday basis. According to S&P Capital IQ, that’s the fastest 10% decline since WWII. Today, interest rate sensitive sectors—utilities, real estate—are in the red due to a higher than expected inflation report. Not surprisingly, financials are in the green because they tend to benefit from higher interest rates. WTI crude oil, which recently fell from $64 to $59, is up modestly to trade around $59.40/barrel. Bonds are selling off as yields tick higher. The 5-year and 10-year Treasury yields are up around 2.63% (a fresh 8-yr high) and 2.89% (a fresh 4-year high). The next stop for the 10-year is likely 3.03%.

US shale oil output is rising rapidly again. Total shale production is up to about 6.7 million barrels per day, according to the Energy Information Administration. That’s higher than the previous peak of about 6 million barrels back in 2015 before the energy crisis. US total crude oil production, up to about 10 million barrels per day, is also at a new peak. Strangely enough, OPEC’s president recently said he doesn’t believe rising US oil production will interfere with OPEC’s efforts to clear the global oversupply of crude oil. Part of the reason is that global oil demand is rising as key economies around the world accelerate. 

The Consumer Price Index (CPI), which measures retail price inflation, was a bit higher than expected in January and investors are a bit spooked. CPI on a year-over-year basis rose at a 2.1% clip vs. 1.9% expected. So-called core inflation, which excludes the more volatile energy and food prices, accelerated slightly to a 1.8% pace. This is why bond yields are rising today. My view is that the initial negative reaction in the stock market is wrong. This is not the end of the world. It’s not even materially negative. Rising inflation is a normal by-product of stronger economic growth. And by the way, CPI is not accelerating any faster than the average of the last 12 months. 

We found out yesterday that small business leader optimism continues to rise. The National Federal of Independent Businesses (NFIB) posted results from its most recent survey, which is now very close to 10-year highs. Business owners answered questions regarding plans to increase capital spending, hire workers, raise prices, build product inventories, etc. A record number of respondents said this is a good time to expand their businesses. In addition, 41% of respondents expect the economy to improve further. 

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