Stocks opened lower this morning (Dow -45 pts; SPX -.1%). Most major market sectors are in the red, led by energy and utilities. Semiconductors and banks, on the other hand, are trading higher. Over the last several days, the VIX Index has collapsed—that is, expected near-term volatility has collapsed. European markets closed .5% lower today after we learned that Italy’s economy contracted in the third quarter and industrial production plunged in November. On the other hand, most of Asia was positive overnight. China’s Shanghai Composite has been cautiously advancing since January 3rd—could that signal some optimism over trade? Commodities are trading mixed today. WTI crude is down 2% to $51.60/barrel, hence the dip in energy stocks. But make no mistake, oil’s new trend is up. Bonds are mostly higher today, except junk which is following the stock market pretty closely these days. Interest rates are down across the curve today. The 5-year and 10-year Treasury yields are back down to 2.52% and 2.70%, respectively.

Bloomberg ran an article this morning about the sudden rebound in credit markets (i.e. the corporate bond market). Over the first 11 months of 2018 there was nowhere to hide in the bond market. Both high-grade and junk corporates fell in value. The iShares Investment Grade Corporate Bond ETF (LQD) was down 5.5% in that time. But since then, we’ve seen a sharp turnaround in sentiment among bond traders, and LQD is up 2.5%. The article quotes one fund manager as saying, “There’s definitely been a change in tone, and it’s definitely risk on. This reversal has re-instilled some of the confidence the market had prior to October that the expansion can continue.”

The Consumer Price Index (CPI) slowed to 1.9% year-over-year growth in December. So much for the inflation scare that struck markets a year ago. The massive decline in oil from October through December is largely responsible for slower inflation. Excluding energy & food, CPI is up 2.2% from year-ago levels. But that’s still pretty tame. Some investors don’t trust CPI to reflect true retail price growth. But strangely enough a popular alternative, the New York Fed’s Underlying Inflation Gauge (UIG), is also running at 2%.

Equity strategist Tom Lee says it’s very probable the US stock market could see a double-digit return this year. The key is to avoid a recession. If we manage that, history suggests the market could briefly re-test correction lows and then move to new highs. He points out that oil and high-yield bonds have turned around, the Fed is softening their rate hike rhetoric, and a lot of risk has been priced-in to stocks.

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