August 20, 2018

Stocks opened higher this morning (Dow +77 pts; SPX +.24%). Most sectors and industry groups are in green, led by energy, materials and industrials. However, semiconductors, gold miners and biotechs are not participating. The VIX Index is down slightly to trade around 12.5. Remember, the VIX is coming off of a mini spike to nearly 15 a week ago. European stock markets are broadly positive today, in the neighborhood of +.8% and most of Asia traded higher overnight. The dollar is flat against a basket of foreign currencies today but has spiked this month. WTI crude oil is up slightly to trade around $66.20/barrel. Copper is sitting near a 13-month low, mostly in sympathy with China’s trade war-induced stock market correction. Save oil, commodities generally haven’t done well this year (Gold -9%, silver -14%, iShares Global Agricultural Producers ETF -2%; iron ore flat). Bonds are up in price, down in yield this morning. The 5-year Treasury yield backed down to 2.70% and the 10-year yield fell to 2.83%. It does appear that yields are range-bound for the near term. In fact, over the last seven months the 10-year has been mostly confined to the range of 2.80% to 3.00%. 

CVS Health (CVS) is rising for the 11th consecutive trading session. During that time, the stock is up about 16%. After a multi-year 46% slide, it’s about time. The company reported pretty strong second quarter results, with profits rising 27% from year-ago levels. But the big reason for the rally is CVS Health’s planned acquisition of health insurance carrier Aetna (AET). Management, and investors, believe regulators will allow the deal to close within the next few months. The combined company will have a higher profit margin. More importantly, though, the deal will probably transform the way healthcare is delivered and should help it compete more effectively against Amazon’s (AMZN) planned healthcare venture.  

Famed economist Mohamed El-Erian, formerly of PIMCO, penned a Bloomberg article in which he listed the primary risks to US equity investors. At the top is what he calls “unbalanced portfolio reactions” to some risk factors he labels “known unknowns.” In other words, issues like Turkey’s economic/currency crisis, central bank tightening, trade tariffs & sanctions are causing periodic, sharp increases in volatility. We know what these risk factors are, but have no idea what affect they will have on global stock markets. All the while, more conventional measures of fundamental strength like corporate earnings and economic growth remain strong in the US. As an example, Mr. El-Erian estimates a 25% chance of a full-blown global trade war, which would likely overpower those fundamental positives and cause a serious correction. But how does one really handicap Trump Administration policy intentions, and the reactions of foreign leaders? In addition, the European Central Bank and Bank of Japan are finally on the brink of tightening monetary policy after a long period of “experimental” easing. “No one knows how the global economy and markets will respond” to that. His conclusion seems to be that the “known unknowns” aren’t going away anytime soon. 


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