IMPROVING SENTIMENT

Stocks opened higher again today, as investor sentiment gradually improves. The Dow is currently up 143 pts and the SPX is up .5%. Tech, energy, healthcare and industrials are up nicely in early trading. Utilities, consumer staples, real estate and communications services are in the red. European stock markets will close up by about .5% and Asia was broadly higher overnight. The Shanghai Composite Index, China’s main stock index, closed up .7%. The dollar is down about .5% against a basket of foreign currencies. That’s a big deal. Dollar weakness means emerging markets stocks do better; it means US multi-national exporters do better; it signals that investors believe inflation is well under control and the Fed won’t be aggressive with monetary tightening. It might even signal more optimism (among traders) that the trade war can be resolved. All else equal, commodities generally rise as the dollar weakens. WTI crude oil is up nearly 3% today to trade at $51.25/barrel. Copper and gold are up modestly as well. Bonds are trading slightly higher as well. Both investment-grade and high-yield corporate bond ETFs are up about .2% today. The exception is long-term Treasuries. Whereas the 5-year and 10-year Treasury yields are basically flat to slightly lower, the 30-year Treasury yield jumped up to 3.02%. And remember, we want Treasuries to sell off when the stock market is moving higher. I can’t emphasize enough how closely traders are watching the bond market as a signal to whether the stock market recovery can continue.

Boston Federal Reserve Bank President Eric Rosengren expressed his opinion that while market sentiment is “unduly pessimistic,” the “more optimistic view” will prevail. Still, he believes the Fed can wait for greater clarity before pushing through more rate hikes. Policy makers may need to wait and see how much the economy slows in the first part of 2019. Most investors now believe the Fed will be patient with monetary tightening during the first half of 2019. In an interview on CNBC, Federated’s Chief Market Strategist Philip Orlando said, “If the Fed seems to be in place, if we can get this China trade situation resolved, and if we can get some clarity in terms of what’s going on in Europe, then I think we could be off to the races in the back nine months of the year.”

The weekly volume of mortgage applications in the US shot up more than 20% last week. That’s the biggest weekly jump in apps in over three years. It’s no secret that the housing market has been slowing due to rising home prices, low inventory of homes for sale, and higher mortgage rates. Lennar’s (LEN) CEO said as much yesterday. And he blamed these factors on slower sales and a lack of clarity in the 2019 homebuilding outlook. But it could just be that housing is about to reaccelerate. We got an incredibly strong jobs report last Friday, proving the US consumer is in good financial shape. JP Morgan Chase (JPM) CEO Jamie Dimon confirmed that this week. Also, 30-year fixed mortgage rates have fallen back to 4.4% from over 4.8% just two months ago. That may help explain the jump in mortgage applications.

The stock market has turned the other cheek on the government shutdown, which is approaching its fourth week. Investors seem to be saying, we’ve been here before and congress will figure it out. Today, Senator Lindsey Graham said, “There is a deal to be had. It’s got to be wall-plus.” This came after a private meeting with key Democrats in the Senate. The “plus” likely refers to Democrat demands for protection against deportation of some specific groups of illegal aliens. It remains to be seen, of course, whether the president will acquiesce and sign a compromise agreement.


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