April 17, 2018

Stocks surged at the open, following yesterday’s gains. The Dow is currently up 256 pts and the SPX is up 1%. Consumer discretionary, industrials, tech, materials and real estate sectors are all up over 1% in early trading. In fact, all eleven major market sectors are in the green. The VIX Index, which measures investor fear, is down around 15.6, signaling that the stock market correction is resolving. Commodities are mostly higher on the day. WTI crude oil, recently boosted by geopolitical tensions, is trading down modestly to $66.11/barrel. Short-term bonds are selling off, and yields are resuming their march higher. The 2-year Treasury yield is trading up to 2.40% (a fresh 9 ½ year high), and the 5-year is up around 2.69%. Meanwhile, longer-term bonds aren’t moving much. The 10-year Treasury yield is hovering around 2.83%. And of course, that means the yield curve (difference between short and long rates) is flattening again. The Fed seems intent on two more rate hikes this year, which affects the short end. But inflation expectations have stagnated, and that affects the long end. 

Equity strategist Tom Lee says this is a good time to own equities. Earnings season will show strong business momentum in Corporate America. And yet, he notes investor sentiment is terrible. The American Assn. of Individual Investors (AAII) conducts surveys to determine how people feel about the stock market’s direction over six months. At the moment, 26% identify as bullish and 42% identify as bearish. Mr. Lee notes that extreme bearish sentiment among do-it-yourself investors usually corresponds with market troughs. In other words, sentiment is a contrary indicator. Mr. Lee favors investing in tech, financials, energy, and materials. His 2018 year-end SPX target is 3,000, implying a 10% gain from current levels. 

Housing starts—ground-breaking on new developments—rose 2% in March to an annualized rate of 1.3 million units. That rate of construction is about equal to housing demand generated by population growth. The problem is, most of the month’s growth in construction was due to apartments/condos, not single-family homes. And we know demand for single-family homes is much greater than supply at the moment. So there is still a mismatch between demand and supply, and that means home prices will continue to rise. Some other key factors are supporting home price growth as well: tight job market, improving financial conditions for consumers, relatively low mortgage rates. But Bloomberg reports homebuilder sentiment is a little soft because construction costs are rising rapidly and land availability is tight. This bears watching. 

US industrial production rose .5% in March from prior month levels. That’s a bit better than economists were anticipating. Much of the gain, however, was driven by harsh weather back East that boosted utility demand. Manufacturing fell flat as expected. It does look like manufacturing activity softened a bit over the last 30 days. But the longer-term trend is definitely positive, with production rising steadily over the last two years. 

Johnson & Johnson (JNJ) reported first quarter results today, narrowly beating Wall Street expectations. Both revenue and earnings-per-share rose 13% from year-ago levels. Prescription drug sales surged nearly 20% from year-ago levels. Sales of consumer products rose 5.3%, and medical devices were up 7.5%. Management talked about its new product pipeline developments as well, and raised full-year revenue guidance. Investors were a little put off, however, by management’s $1bil in asset write-downs, as well as a 16% increase in spending on research & development and a 22% jump in administrative & marketing expenses. The stock is down 1.5% today.

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