August 16, 2018

Stocks gapped up at the open this morning (Dow +365 pts; SPX +.94%). Consumer discretionary, financials, industrials and telecom sectors are all up over 1% in early trading. The VIX Index, which spiked to nearly 15 this week, sank back under 13 today. European markets will close up about .8%, whereas most of Asia was down overnight. The dollar is down slightly, giving a little room for commodities to rise. WTI crude oil is back up around $65.50/barrel. Copper is up nicely after taking a massive 20%+ beating this year. Bonds are trading roughly sideways. The 5-year Treasury yield at 2.76% hasn’t moved much in a week. The 10-year Treasury yield ticked up slightly to 2.89%. The yield curve—difference between the 10-year and 2-year—is as flat as it has been this year.  

Year-to-date, by the way, the US stands alone with stock markets up 3-13%. Nearly every other market in nearly every other region of the world is down this year. Mainland Chinese markets are down over 20%. Part of this is a result of a stronger US dollar. For example, the Euro Stoxx 50 Index is down 3.5% in dollar terms but is down 8.5% in Euro terms. 

Larry Kudlow, Economic Advisor to President Trump, confirmed that US and Chinese officials are planning to re-open trade negotiations later this month. While the result of negotiations is by no means certain, Mr. Kudlow said, “Sometimes talks can produce better outcomes than expected.” In addition, he mentioned that the US Trade Representative is “getting close” to a trade deal with Mexico. So there you have it—a little bit of optimism on trade is the major reason the stock market is rallying today. 

Retailers are surging on better than expected numbers. Recently, Home Depot (HD), Wal-Mart (WMT) and Macy’s (M) all raised their earnings guidance for the second half of the year. And it seems pretty clear—admittedly only after the Bureau of Economic Analysis upwardly revised their consumer spending and income data—that the US consumer is in great financial shape. Today, Wal-Mart reported the highest US same-store-sales growth (4.5%) in 10 years. Grocery and apparel were especially strong. Management also raised 2019 earnings guidance. The massive investments in online sales, curbside pickup & grocery delivery are paying off. Online sales rose 40%  from year-ago levels. The stock is up about 10% this morning. 

Cisco Systems (CSCO) reported second-quarter results that beat Wall Street forecasts and the stock is up over 4% today. The company demonstrated evidence of success in shifting sales toward cloud software and services, rather than hardware. That’s important because legacy routers and switches tend to be lower margin and slower growing. That said, the company managed to post positive growth across all three major product lines (infrastructure, applications & security). Managment raised current quarter revenue & earnings guidance as well. 

Bloomberg picked up some interesting comments from First Trust economists Brian Wesbury and Robert Stein. “The United States, for the time being, is a Kevlar economy. It’s practically bulletproof. By allowing other countries to maintain higher tariffs, America, the world’s biggest consumer, has helped those countries to grow. By holding corporate tax rates higher than most other countries, the US has subsidized non-US growth. But under new management, the self-sabotage is being eliminated.” They note the US is “making itself more competitive” and it will continue to grow “while other countries suffer a loss of investment and sales.” 

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