May 18, 2018

Stocks opened mixed this morning as investors await results of trade talks with China. The Dow is flat and the SPX is down .14%. Industrials and biotechs are up modestly, but most everything else is trading down. European markets are poised to close a bit lower. The VIX Index is back up around 13.6. The dollar continues to slowly strengthen and yet commodities are also rising. The dollar is now up 1.7% for the year and the Bloomberg Commodity Index is up 2.6%. WTI crude is unchanged today at $71.40/barrel. Bonds are trading higher as yields dip. The 5-year Treasury yield is back down around 2.90% and 3.01%. 

Tobias Levkovich, Citi’s Chief US Equity Strategist, was interviewed on CNBC this morning, and put everything in perspective for us. He said trade, yield curve, rising rate and higher gasoline price concerns are “not at all important.” What is critical for investors to note is the recent Senior Loan Officer Opinion Survey from the Federal Reserve. The survey suggested credit conditions are easing, not tightening. He says this survey has “always” been a 9-month leading indicator for economic activity. “Investors really want to have some conviction about the latter part of this year. And actually the credit data, or the credit conditions environment, is actually very positive. And [yet] people are still struggling with things like, taking about trade and getting distracted.”

First quarter earnings season is nearly complete. About 460 of the S&P 500 companies have reported results. In aggregate, 74% of those companies beat Wall Street revenue forecasts and 81% beat earnings-per-share forecasts. Those are very positive figures. In terms of year-over-year growth, revenue rose 8% and earnings shot up over 23%. That’s incredibly strong. The stock market is up about 2% since the reporting season began last month but of course everyone is talking about the fact that stocks are struggling to recover from the Jan/Feb correction. So there is a perception that investors were unimpressed with first quarter earnings. That’s not necessarily true, but there are a few reasons why the market’s reaction to earnings wasn’t euphoric. First, 23% earnings growth is just too high to be sustainable. And at the moment, Wall Street expects growth to decelerate to 10% in 2019. Second, everyone knew first quarter results were going to be excellent. A lot  of the positivity was priced into the market in December/January. And third—as Mr. Levkovich said—what investors really want is conviction about the future, and CEOs didn’t really come out strong with aggressive guidance.   

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