June 6, 2018

Stocks opened higher again this morning (Dow +224 pts; SPX +.4%). Financials are rebounding over 1.5% as interest rates head higher. So not surprisingly, the utilities sector is down over 1.5%. Emerging markets funds are up 1% today and look to be recovering a bit from a beating in recent weeks. The dollar, which has been falling over the last week or so, is giving overseas stocks some breathing room. The VIX Index continues to slide, now trading under 12, suggesting little fear among investors. Commodities are mixed, with WTI crude oil down another 1% to trade around $64.80/barrel. Recall that oil was over $70 a couple of weeks ago. Bonds are selling off as yields tick up. The 5-year and 10-year Treasury yields are back up to 2.81% and 2.97%, respectively.

We got first quarter 2018 productivity data from the Bureau of Labor Statistics. On a year-over-year basis, US worker productivity grew 1.3%, which is right on pace with what we’ve seen over the last five quarters. Labor costs also rose 1.3%, a bit less than the prior quarter’s 1.8%. Labor productivity may not move the market today, but it is important in the long-term. Higher labor efficiency drives improvement in Americans’ standard of living. The report is also an indicator of future inflation. Our takeaway is that wage inflation is gradually rising. 

Famed investor Leon Cooperman was interviewed on CNBC this morning. He said markets are heading toward “normalization,” which means central banks around the world are beginning to raise interest rates. Based on 4% nominal economic growth in the US, he says the 10-year Treasury note yield should be 4%, and he thinks it will get there over the course of the next two years. So rising rates will be a headwind for the bond market. As for the stock market, he says it is currently fairly valued (but not over-valued). For 2018, he expects the S&P 500 will range between 2500 and 3000. In other words, down 9% or up 9% from current levels. So he is a “reducer on strength, not a buyer on strength.” The issue is that rising inflation will “catch” the market, perhaps as early as next year. Mr. Cooperman notes that once the 10-year Treasury reaches 3.5% bonds will represent stronger competition for investors dollars, relative to stocks. And yet, none of the traditional bear market warning signs are present. “If anything, the economy is getting stronger.” So he isn’t panicking and is still constructive on stocks long-term. 

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