March 27, 2018

The major stock market averages opened higher after yesterday’s massive short-covering rally in which the Dow had its third-best day in history. At the moment, the Dow and SPX are up 220 pts and .5%, respectively. After spiking to 25 yesterday, the VIX Index is down around 20 today. European markets are poised to close up about 1% and most of Asia was up overnight. All eleven sectors are in the green led by telecom, industrials and consumer staples. Traders are watching closely to see if Friday’s low holds. If so, last week’s volatility would simply be a classic rebound and re-test of the February correction low. Commodities are trading a bit lower today. WTI crude oil down .3% to $65.30/barrel. Bonds are modestly higher in price, lower in yield. The 5-year and 10-year Treasury yields are trading at 2.61% and 2.82%, respectively. After the rate spike in January & February, it makes sense that we’d see a pause in the trend. Rates have gone nowhere in March. 

Canaccord’s Tony Dwyer was interviewed on CNBC yesterday. He continues to believe that the first half of the year will be marked by volatility. Stocks reached full valuation in January and the correction provided a necessary re-set and pause. He brushes aside temporal concerns such as trade war fears, saying this is a normal market correction and “trade wars is the excuse.” The second half of the year will be more positive. Mr. Dwyer’s preferred theme for investing in this environment is “productivity.” That is, invest in sectors that are adding to the economy’s productivity: technology, industrials, financials. Corporate earnings will likely grow 20% this year and those sectors will outperform.  

The S&P Case-Shiller Home Price Index roe 6.18% in January from year-ago levels. Home prices in the 20 largest US metro areas rose 6.4% y/y. Housing market demand remains steady, but unfortunately there just aren’t enough homes out there for sale. The Nat’l Assn. of Realtors says the number of previously owned homes on the market in January shrank to the lowest number of any January going back to 1999 when records began. The rate of home price appreciation in this country has been accelerating over the last three years so affordability, especially on the West Coast, is suffering. Annual price growth of 6% is just too high to be sustainable—especially when mortgage rates are rising. But that’s what happens when there’s limited supply. 
 


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