February 23, 2018

The major stock market averages gapped up this morning (Dow +162 pts; SPX +.75%). But if the last few days are any indication, it won’t hold. We are in clearly in a back-and-fill mode after the recent correction. Interest rates moved lower today, giving breathing room for utilities (+2%) and REITs (+1%). In addition, rising oil prices are powering the energy sector (+1.1%). In addition, tech stocks are up nearly 1% in early trading. The VIX Index is ever so slowly fading; now at 18.5. VIX March futures are trading around 17.8, suggesting that trend continues over the next 30 days. We’ll see. Some well respected traders and analysts are expecting the SPX to fall and re-test its lows of 2/9 and that would certainly be accompanied by another mini spike in the VIX. Suddenly, despite record US oil production, WTI crude oil is trading back above $63. The excuse is a temporary dip in Libyan production. The bond market is trading higher today as yields come in. The 5-year and 10-year Treasury yields are now trading at 2.61% and 2.87%. 

The Federal Reserve, now led by Chair Jerome Powell, issued a monetary policy report to congress today. In part, it predicted that inflation will float upward and reach the Fed’s 2% target by 2019, at which point it will stabilize. In addition, the labor market is actually beyond “full employment” and the unemployment rate will likely fall below 4%. But officials are not sure why inflation pressure isn’t yet responding to that. The best they can do is vaguely reference “technological advances” and “online retailers keeping prices low” (Amazon). The Fed’s 2018 GDP estimate is 2.5%. And finally, Fed officials believe asset prices, especially in commercial real estate and equities, as are corporate debt levels. I should add that the Fed’s stock valuation calls are typically not timely, and their economic predictions are usually wrong.  

We now have a very clear picture of corporate earnings for the fourth quarter of 2017. S&P 500 companies reported revenue growth of 7.7% and earnings-per-share growth of 15% from year-ago levels. All eleven major market sectors posted positive revenue and earnings growth, led by energy, materials and technology. Wall Street expects 2018 to be another positive year, with about 15% earnings-per-share growth. These are very strong numbers. 

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