July 11, 2018

Stocks sank at the open this morning as the Trump Administration proposed an additional 10% tariff on $200bil of imported Chinese goods. The Dow is currently down 157 pts and the SPX is down .6%. Semiconductors are down more than 2% in early trading. The worst performing sectors are energy, materials and industrials—all down over 1%. Only utilities are in the green. European stock markets are poised to close down over 1% and Asia was down over 1% last night. Most commodities are also trading lower. WTI crude oil is back down to $72.60/barrel. Bonds are mostly unchanged today. The 5-year and 10-year Treasury note yields are currently at 2.75% and 2.85%, respectively. 

Yesterday, CNBC reported that 98% of this year’s gains in the S&P 500 Index are due to a small handful of stocks: Amazon, Microsoft, Netflix, Apple, Alphabet, and Facebook. In fact, the first three names on that list are responsible for 71% of the index’s gains. That is the textbook example of narrow leadership and it’s not sustainable. 

The Producer Price Index (PPI) jumped 3.4% in June from year-ago levels. That’s the fastest pace of wholesale inflation in 6 ½ years. Economists had expected PPI to rise 3.1%. The so-called “core” PPI, which excludes food & energy, accelerated to 2.7%. The bottom line is that the cost of doing business is rising and at some point this will spill over to higher consumer prices. In light of this report, it’s difficult to understand why bond yields aren’t rising today.

Nuveen’s Stephanie Link summarized the current stock market situation on CNBC yesterday.  She identified two “worrisome” points: first, oil prices are up quite a bit, and of course higher energy inflation can negatively impact corporate profits and consumer spending. Second, she worries about the flatness of the yield curve, which is traditionally a sign of coming economic weakness. However, she discounts this signal because interest rates are being “manipulated” a lot by global central banks (i.e. Japan, Europe). Despite these concerns, she says, “If you have double-digit earnings [growth] and low inflation, you’ve got a solid consumer…you’ve got [strong capital spending], I don’t see why you wouldn’t see a higher market. We could see 5% in a week…”

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