February 16, 2018

The major stock market averages opened higher again today (Dow +150 pts; SPX +.6%). Thus far, the SPX has retraced about 60% of the damage done in the recent correction. Today, telecoms, healthcare and utilities are the best performers. This is really just catch-up as interest rates fall back a bit. The VIX Index is down around 18, providing a bit more confidence that the correction is really over. The dollar is stronger today (but still down 3% on the year). WTI crude oil is up around $61.70/barrel. Remember, a weaker dollar usually helps commodity prices. Bonds are trading higher as yields tick down. By the way, the 10-year Treasury yield hit 2.91% yesterday, the highest since Jan. 2014. 

Famed money manager Jim Paulsen predicts more stock market volatility this year. “I think we could have a 15% correction” as the 10-year Treasury note yield rises above 3%. Crucially, he doesn’t see a “permanent collapse” of stocks because the economy and corporate earnings are strong. But this will be an “adjustment year” allowing earnings to grow into valuations. 

Inflation is clearly accelerating. We just learned that import prices rose 3.6% y/y in January, the fastest rate in about 9 months. Part of that is being driven by a weaker dollar and of course higher oil prices. But even excluding energy, import price inflation is building. Export prices rose 3.4% y/y, the fastest rate in 10 months. 

Housing starts surged in January to an annualized rate of 1.32 million units. The report surprised economists and represents the strongest rate of building activity we’ve seen since before the Financial Crisis. It’s no secret we’ve been under-building for 10 years and are just now keeping pace with population growth. So there’s likely more runway for homebuilders. 
 


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