August 24, 2018

Stocks gapped higher this morning (Dow +154 pts; SPX +.6%). Flip-flopping from yesterday’s session, cyclical sectors like materials, energy and tech are leading the way. Utilities and consumer staples sectors are flat. This comes despite impeachment talk in Washington, no apparent progress in trade talks with China, and Fed Chair Powell’s comment that our economic expansion supports the case for further gradual interest rate hikes. The reason for today’s rally appears to be the durable goods report (see below). The VIX Index fell back toward 12 this morning, indicating very little expected volatility over the next 30 days. European stock markets are poised to close about .3% higher but Asia was mixed overnight. The Chinese stock market can’t get out of its own way. The Shanghai Composite Index is down 21% this year. Today, the dollar is weaker and not surprisingly commodities are higher. WTI crude oil is trading up around $69.50/barrel. Copper is up over 2% after having fallen more than 20% this year. Bonds aren’t moving much. The 2-year Treasury yield, which tends to reflect Fed rate hike expectations, has gone nowhere for the last month. In other words, investors don’t believe the Fed will more aggressive with rate hikes. And yet, the difference between the 2-year and 10-year yields has fallen to just 19 basis points (.19%). 

President Trump has said that the market will crash if he “ever got impeached.” Today in a CNBC interview, a PIMCO economist said, “Politics in Washington is not that important.” That pretty much sums up the consensus opinion among professional investors. 

Durable goods orders fell 1.7% in July from prior month levels, but don’t be mislead by that headline. The details are much more encouraging. It turns out weakness was driven solely by a temporary dip in commercial aircraft orders. Orders for other business equipment such as computers, electronics & machinery were very strong. The most useful part of this report is a series called Capital Goods Orders Non-Defense Excluding Aircraft, which gives a clearer picture of corporate capital spending. This measure accelerated to 9.8% y/y growth, which Barron’s calls “stunning.” In fact, 9.8% growth is right around the fastest pace of growth we’ve seen in six years. Remember, orders are a leading indicator suggesting that third quarter gross domestic product (GDP) will be strong. 

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