April 3, 2018

Stocks opened higher today, reversing yesterday’s rout. The Dow and SPX are currently up 113 pts and .4%, respectively. All eleven market sectors are in the green, led by consumer staples (+.8%) and materials (+.7%). In addition, small-caps and emerging markets are up between .7% and 1% in early trading. The VIX Index is back down to 22 after briefly touching 25 yesterday . WTI crude oil is trading back up to $63.40/barrel. Bonds are selling off with yields moving higher. The 5-year Treasury note yield is back up to 2.6% and the 10-year is up around 2.78%. The yield curve has flattened somewhat over the last couple of weeks, meaning that long-term inflation expectations are not keeping up with short-term Fed rate hike expectations. The difference between the 2-year and 10-year yields fell back to 50 basis points (or .50%). That’s the smallest spread since the fall of 2007. 

In a CNBC interview yesterday, Schwab’s Liz Ann Sonders said the reason for the Jan/Feb correction was that the “sentiment environment…got too frothy.” The market had gone up in a straight line and investor optimism was ruling the day. Yes, we all talked about rising inflation expectations and a potential government shutdown & debt ceiling fight, but those were only excuses for the market to sell off. Have we “washed that froth out?” She’s not sure. CNBC Contributor Brian Kelly has a slightly different view. “We’re not looking at a slowdown in growth. This is a re-pricing of what’s going on.” In other words, stock valuations got carried away and needed to be reset. But now he senses very weak investor sentiment after the volatility has taken hold. And he reminds us that negative sentiment combined with solid fundamentals create good buying opportunities. 

Jim Paulsen of The Leuthold Group urges investors to “proceed with caution” this year. He agrees that euphoric investor sentiment is dangerous because it leads to overly aggressive investing. His research suggests “investor confidence and aggressiveness across all financial markets is nearly as pronounced today as it was at the last two major stock market tops.” More specifically, this behavior reached its peak in January and there are now signs of a new shift toward less aggressive investments like defensive stocks and high-grade bonds. Is this shift durable? It’s too early to tell. 
Amazon (AMZN) and Tesla (TSLA), poster children for aggressive investing, are picking themselves up off the floor today. TSLA says Model 3 production is up to 2,000 per week. That’s less than the 2,500 promised, but investors are getting used to production disappointments. Just as important, TSLA says it will not need more capital (either a secondary or debt offering) this year. If true, that’s very good news. TSLA is up 4% today. As for AMZN, President Trump continued to press his Twitter attack today, but after falling 14% over the last few weeks, the stock is rebounding 1%. 

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