June 27, 2018

Stocks opened higher (Dow +130 pts; SPX +.35%) following this week’s overreaction to trade rhetoric from the Trump Administration. Ten of eleven market sectors are in the green, led by energy, industrials and materials. Only healthcare is in the red. The VIX Index is back down to 15.5. European markets are poised to close up about 1% despite continued weakness in Asia overnight. Oil shot back up to $72.60/barrel. Bonds are rising in price as well. The 5-year Treasury yield has fallen back to 2.72% from its May high of 2.94%. The 10-year yield is back down to 2.85%. Go figure. 

Today’s durable goods orders report was full of noise, so I’ll dispense with the nuanced explanation and get to the point. Business orders for new capital equipment grew 6.6% in May from year-ago levels. The report is issued monthly and 6.6% is in line with 2018’s average. Business investment is chugging along at a healthy rate, after having plunged in 2015 & 2016 due to weaker global economic growth, the oil crash and a much stronger dollar. Of course, the fear on Wall Street is that escalating trade tensions may cause US businesses to hold back on planned investments until things calm down. 

Pending home sales fell 2.8% in May from year-ago levels. The volume of signed contracts for home purchases have been in a shallow downtrend for that last year-and-a-half. The Nat’l Assn. of Realtors says this reflects a persistent shortage of homes for sale (i.e. inventory). In other words, the issue is not demand, but supply. It seems pending sales in the South dragged down the entire index; if you strip that out, signed contracts in the West rose .6%, the Northeast rose 2% and the Midwest grew 2.9%. But it is possible that the volume of home purchases could sag if mortgage rates and home price growth continue to outpace wage gains.  

Citigroup’s US Economic Surprise Index has declined to 1, from about 80 at the beginning of 2018. That means economists are now accurately estimating the various indicators that measure the health of the economy. It also means that the strength of the economy is no longer a surprise to anyone. And we all know that positive surprises and rising expectations drive the stock market. So by this measure, it makes sense that US stocks are roughly flat this year.  

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