February 22, 2018

As with the last two days, stocks opened higher (Dow +303 pts; SPX +.95%). If the two-day trend holds, they’ll give way late in the session. Interest rates ticked lower this morning so we’re seeing a rebound (1%+) in utilities, real estate and telecom sectors. Cyclicals are also joining the party (energy +2%, industrials +1.3%, materials 1.3%). Even the banks are up slightly. The VIX Index is hovering around 18.7 and will probably continue to fade after the recent spike. WTI crude oil is up around $62/barrel. Oil, by the way, is up about 6% over the last 3 months. Bonds are rising in price as yields come in a bit. The 5-year Treasury yield is back down to 2.65% and the 10-year is trading around 2.91%. The 10-year is very close to 3%, which could be a key psychological level. Long-time floor trader Art Cashin says, “the assumption [among traders] is once they do it, all hell will break loose [in the stock market].” So we could see some more stock volatility in the near-term depending on how quickly rates move higher. 

The Index of Leading US Economic Indicators (LEI) improved more than expected in January from prior month levels. LEI has been rising on a year-over-year basis since mid-2016 and is now up 6.2% from year-ago levels. This index gauges expectations for economic momentum over the next six months. It includes all kinds of data like corporate capital spending, interest rates, unemployment insurance claims, business activity surveys, building permits and stock prices. The headline on the press release reads, “Economic growth to continue through the first half of 2018.”

Ray Dalio, hedge fund manager, said in a CNBC interview that he predicts an economic recession before the next presidential election in 2020. He believes “we are in a pre-bubble stage” now, and that the stock market will have to rise significantly in order to produce a bubble. Accordingly, he says the recent correction is not a cause for panic. Indeed, Bloomberg reports the average Wall Street analyst year-end price target for the S&P 500 Index is 2,950, about 8% higher than current levels. Ten percent pullbacks are rather common, and the shocking rapidity of this correction was due primarily to an unwind of positions in risky short-volatility funds.  

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