January 7, 2019

Stocks opened modestly higher this morning as China trade talks get underway. The Dow and SPX are current up 91 pts and .6%, respectively. Consumer discretionary (+2%) and energy sectors (+1%) are faring the best in early trading. Worst performing are utilities (-.7%) and consumer staples (-.2%). The dollar is a bit weaker today and that’s giving commodities some breathing room. WTI crude oil is back up over $49/barrel after Dow Jones reported the Saudis would like to push oil prices back up to $80/barrel. Bonds are trading higher along with stocks. You don’t see that very often. It is true that lately when the stock market rises, corporate bonds also rally. But Treasury bonds don’t usually move in tandem with stocks. The 10-year Treasury yield is hovering around 2.67%. My guess is that investors would like to see Treasuries sell off a bit and give stocks an all-clear signal.

Investors are watching closely to see if last week’s rally can be extended. Most professional investors are saying that despite much more encouraging Fed messaging, a strong jobs report, fiscal stimulus in China, and now good news on oil, we’re not yet out of the woods. I’m not so sure. Remember, last week’s profit warning from Apple (AAPL) didn’t break the rebound. Whereas two weeks ago, the market was looking for excuses to fall, now it seems to want to rise. Does that mean risks to market outlook from a trade war, slowing global growth, central bank tightening, etc. have been adequately priced-in? Perhaps.

The stalemate between congressional Democrats and the president continues over funding for the proposed border wall. Certain government departments, held hostage by the political squabble, have been shut down for 17 days. Both sides met to negotiate over the weekend, with little apparent progress. The president is asking congress to fund $5bil toward building 234 miles of steel wall along the border. Some type of permanent fencing already exists in parts of California, Arizona and New Mexico covering roughly 700 miles.

The ISM Non-Manufacturing Index fell to 57.6 in December from 60.7 in the prior month. The move puts the index right back where it was last summer. As a reminder, any reading above 50.0 suggests services businesses in the US are expanding. So the latest report confirms moderating growth, but growth nonetheless. What’s more, the “new orders” component of the index actually improved to an incredibly strong 62.7. Health in the services sector is critical since services businesses represent about 90% of the US economy. ISM chairman Anthony Nieves says, “Conditions are still good. It’s a pullback, yes, it’s a cooling off, but it’s still a good operating rate of growth.” Conditions on the manufacturing side of the economy aren’t as strong. Last week we learned the ISM’s Manufacturing Index fell to 51.1 and new orders for manufactured goods are barely growing.

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