January 8, 2019

Stocks opened higher yet again today (Dow +165 pts; SPX +.45%). The financial sector is down nearly .6% and the tech sector is pretty flat. But every other sector is in the green, led by communications and energy. WTI crude oil extended its recovery from the late 2018 crash and is now trading up around $49.50/barrel. Most of the bond market is trading higher as well, meaning that interest rates are lower. Junk bonds are up over .3% in early trading (see below). High-grade corporate bonds are up about .2%. Treasury bonds are modestly lower on the day, which is what you would expect. The 5-year and 10-year Treasury yields are back up around 2.55% and 2.71%. I expect they’ll head higher from here.

In an interview today, JP Morgan (JPM) CEO Jamie Dimon said he believes the US economy is not sliding into recession. “My view is that the consumer is in good shape and is continuing to grow, and they have backwinds with jobs and wages going up.” He acknowledged, however, that economic growth is slowing and the trade dispute adds uncertainty to the outlook. But while some softness in the stock market makes sense, “I think markets are overreacting to short-term sentiment around a whole bunch of complex issues.” He foresees “decent growth” in 2019.

Mr. Dimon mentioned one more thing—optimism regarding recent moves in the junk bond market. Stock investors like to watch the bond market as a canary in the coal mine. Strength in junk (and even high-grade corporates) can signal an improving economic outlook, and vice-versa. Today, Bloomberg ran an article about Wall Street strategies warming up to corporate credit again. Analysts at Morgan Stanley, Bank of America and JP Morgan are saying that last year’s corporate bond selloff has created a good buying opportunity. Take the SPDR High-Yield Bond ETF (JNK), which sold off about 12% from August 2017 though Christmas Eve 2018. Since then, the fund has rebounded nearly 5%. Looked at another way, the difference between 10-year junk bond yields and the 10-year Treasury Note yield increased from about 3% to 5.3% from October through Christmas Eve. That “yield spread” has just fallen back to 4.8%. So on balance, the bond market is expressing a little less fear about the future.

The Nat’l Federal of Independent Business (NFIB) Small Business Optimism Index edged lower to 104.4 in December vs. 104.8 in the prior month. Economists were expecting a bigger drop to 103. Investors and traders are watching this survey closely, looking for any signs that Corporate America is spooked by the trade war, government shutdown & other political uncertainties. And indeed, while the index is still at elevated levels, it has dropped from 108.8 last August. The reason we care so much about how business leaders feel is that they control capital spending and hiring, two drivers of economic growth. Digging into the details, 23% of respondents say they are planning to hire more employees (slightly better than the prior month). The percent of business leaders who say they are struggling to find qualified workers jumped to 39% in December from 34% in November. That’s the good news. On the other hand, only 16% plan to boost capital spending in the near future (vs. 22% in November). And the percent of those who say it’s a good time to expand their business fell to 24% from 29% in the prior month. So all the political shenanigans we’re facing are having an impact.


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