SIGNS OF OPTIMISM

Stock market averages are mixed in early trading today. The Dow is up about 97 points but the S&P 500 (SPX) is flat. Industrials and materials are up about 1%, and that’s important because those sectors are among the most vulnerable to a continued trade war with China. So this is a sign of optimism regarding a potential deal between President Trump and Xi Jinping. Trade tensions are of course one of three major concerns for investors at the moment. The other two are slowing global economic growth and the (temporarily resolved) government shutdown. European stock markets closed higher by .5% to 1% today. Asia was mostly lower overnight, but China’s Shanghai Composite Index is up 6% so far this year. Commodities are mostly higher as well today. WTI crude oil shot up nearly 3% to trade around $53.50/barrel (see below). The Bloomberg Commodity Index (BCOM) is up almost 5% this month. By the way, the fact that commodities are recovering from last year’s rout probably signals a little more optimism about the global economy going forward. Treasury bonds & high-grade corporates are trading broadly higher as yields tick lower. The 5-year and 10-year Treasury note yields are hovering around 2.56% and 2.72%.

Saudi Arabia’s energy minister reiterated in a Bloomberg interview that his country is cutting oil production to prop up oil prices. But those cuts take time to wind their way through the global economy. “…what we are seeing in terms of fundamentals of the oil business today is the result of what took place in November and December.” So January’s production cuts (close to 1 million barrels per day) will begin to take effect in February & March. At the same time, the Saudis expect global oil demand to pick up at the beginning of the second quarter. So in short, higher oil prices are coming.

The Case-Shiller US Home Price Index rose 5.2% from year-ago levels in November. Among the 20 largest metro areas, home prices rose 4.7%. Both of those measures have been decelerating over the past year as affordability finally reached levels that caused potential home-buyers to balk. But this is not a cause for panic. We need to see home price growth moderate. Bloomberg economists “don’t expect the market to crash, given support from tax cuts, rising wages and general economic health.”

Traders (and investors) are worried about missing out on a potential sharp recovery in stock prices following last year’s 20% correction. Kevin O’Leary of CNBC and Shark Tank fame says, “I have to be long equities because I don’t know when a trade deal will be announced.” He’s “hiding in the weeds” in large-cap, stable stocks, which he calls “boring.” But he won’t sit on cash for fear of missing out.


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