February 21, 2018

The major stock market averages opened higher this morning (Dow +126 pts; SPX +.55%). Gold miners, banks and transports are rebounding +1%, while defensive sectors like real estate, telecom and consumer staples are down. The VIX Index is trading down around 18.5, which is good news. There’s still a chance that the market dips to re-test the correction low of 2/9, but thus far stocks are clearly in recovery mode. WTI crude oil is down modestly around $61.50/barrel. Last week, the Baker Hughes Rig Count climbed by 7 to a total of 798 active drilling rigs. That’s 201 higher than year-ago levels. US oil production has reached a new record of 10.2mil barrels per day. Bonds are slightly lower as yields march gradually higher. The 5-year and 10-year Treasury yields are up to 2.65% and 2.90%, respectively. 

Bob Doll of Nuveen Asset Management is surprised that stocks have recovered so rapidly from the recent correction. In the near-term, the market needs to “pause and do some testing.” A decision point is approaching. “Do we take some money off the table, do we reduce beta, do we get concerned that interest rates and inflation are coming back?” He believes rates will continue floating “irregularly” higher. So if economic growth and inflation/rates are going higher, why is the dollar weakening? Mr. Doll attributes this to the fact that rates and growth are picking up overseas as well. And he expects dollar weakness to persist this year. That’s usually good for US multi-nationals doing business overseas, and emerging markets investments. 

Home Depot (HD) reported solid January quarter results, with 8% revenue growth and 18% earnings-per-share growth. Same-store-sales shot up 7.5% vs. 6.0% estimated. Management says rising mortgage rates won’t hurt Home Depot’s sales because rising home prices, a tight job market and tax cuts will continue to fuel home improvement. Wall Street analysts are busy raising 2018 earnings estimates for the company. Citigroup’s new 12-month price target is $210/share, Argus now says $215/share, and Wedbush pushed its target to $190/share.  

Existing home sales fell 3% in January to an annualized rate of 5.38 million units. The dip was unexpected, but keep in mind the volume of existing home sales is still at the high end of what we’ve seen over the last 10 years. Bloomberg says last month’s decline was just some give-back following a huge spike in transactions last fall. 

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