May 21, 2018

Stocks are surging after Treasury Secretary Mnuchin put a positive spin on trade negotiations with the Chinese. So don’t expect it to last. The Dow is currently up 280 pts and the SPX is up .65%. All eleven major market sectors are in the green, led by industrials (+1.5%) and financials (+.8%). Commodities are  mostly higher as well. WTI crude oil is up 1% to trade around $72/barrel. The march higher continues, and investors are starting to think about commodity inflation’s eventual impact on consumer spending the corporate earnings. Bonds are mostly unchanged today. The 5-year and 10-year Treasury yields are hovering around 2.90% and 3.01%, respectively. 

Secretary Mnuchin mentioned “very meaningful progress” in trade negotiations with China. He said the Chinese have agreed to import more US goods, to the tune of $40bi to $50bil per year, and that the trade war is now “on hold.” Trade representatives from both countries have inked a “very comprehensive framework agreement that needs to be implemented, but has lots of different aspects.” The strange phraseology seems to suggest skepticism that the Chinese will actually follow through, and in any case implementation will be slow and complicated. He then moved onto “what everybody should be focused on”: US economic growth should rise to 3% in 2018. “That’s our scorecard.” A former investor, the secretary said he is bullish on stocks. 

Goldman Sachs’ Chief US Equity Strategist, David Kostin, was interviewed on CNBC today. He noted corporate earnings were up 23% from year-ago levels last quarter. And even if you exclude the impact of tax reform, pre-tax corporate earnings were up 14%. That’s a very rapid growth rate. As further evidence of strong business trends, he points to 11% aggregate sales growth. He projects strong economic growth this year and next, and says we shouldn’t worry about rising rates until the 10-year yield reaches 4%. The reason is that higher rates are typically a by-product of stronger economic growth, and that’s a good thing. 
 


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