August 29, 2018

Stocks shot up at the open this morning (Dow +86 pts; SPX +.58%). The market seems to want to move higher, and nobody is complaining about the Fed or Turkey’s financial crisis this week. Cyclicals are leading again today—technology, materials, biotechs, consumer discretionary. However, I’d point out that financials aren’t part of the rally even though interest rates are rising. The 5-year Treasury yield is up around 2.79% and the 10-year yield is back up to 2.89%. For most of 2018, the 10-year rate has bounced around between 2.8% and 3.0%. Typically, with stronger economic growth and corporate earnings, you’d see rates rising. But strong demand from global investors buying Treasuries instead of their own country’s sovereign bonds is keeping our rates lower.  

US stocks continue to lead the world. The Nasdaq, which just posted another all-time high, is up 17% this year. The Dow Jones Industrial Average is up only 5.8%. But that’s still far better than most other markets. Japan’s Nikkei, France’s CAC 40, Canada’s TSX and Taiwan’s TAIEX are up a mere 1-2% so far in 2018. Other European indexes are down 3-7%. Chinese indexes are down 20%.   

Pending home sales disappointed in July, falling .7% from prior month levels. On a year-over-year basis, the volume of contracts signed is down .5%. On this basis, pending sales have been flat to down for the last year-and-a-half. Bloomberg says the US housing market is simply “overheated.” Affordability is just not there, especially in the South and West. Home prices are beginning to respond, and that’s good news. The Case-Shiller Home Price Index is up 6.2% from year-ago levels and we can expect that to decelerate toward the 4-5% range. 

Second quarter US economic growth (Gross Domestic Product) accelerated to 4.2%. That’s the highest quarterly growth in nearly 4 years. The bottom line is the economy is doing very well. Digging into the details, I should point out that usually, GDP is measured on a quarter-over-quarter, annualized basis. On the other hand, I like to measure GDP in terms of simple year-over-year growth. On that basis the economy is growing at a 2.9% pace—the highest in nearly 3 years. The report confirmed that consumer spending and business investment are very healthy, and also that inflation is rising but well under control. Economists are quick to point out that 3-4% annual growth is not sustainable, and growth will likely slow toward the 2.5-3% range. 

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