STOCKS & BONDS RISING TOGETHER

Stocks opened slightly higher this morning (Dow +21 pts; SPX +.2%). Consumer goods sectors are up about .7% after Wal-Mart (WMT) reported strong fourth quarter results. Other than that, cyclical sectors are faring worse than the defensives. Traders are pondering—now that the SPX has risen back above its 200-day moving average—whether the recovery rally can continue, or some consolidation is needed after a really strong run. WTI crude oil is up a little to trade around $55.80/barrel. Copper is up nearly 2% today and nearly 10% so far this year. Bonds are trading modestly higher as interest rates tick lower. The 5-year and 10-year Treasury yields are back down to 2.46% and 2.64%, respectively. The Treasury bond market and stock market essentially don’t agree right now. Stocks are telling you the economic outlook is a little less positive but things are OK. The bond market seems to be less optimistic. But remember, Treasuries are reflecting a more dovish Federal Reserve, and also ultra-low or negative sovereign rates overseas. So lower Treasury yields aren’t necessarily warning of a coming recession. As evidence, look to the junk bond market, which is up over 5% so far this year. If the bond market really believed recession was coming within the next year, you’d see much higher junk yields.

Wall Street research shop CFRA notes the stock market has recovered most of its late 2018 correction, but at the same time, corporate earnings estimates continue to fall. About 6 months ago, Wall Street consensus called for 8-10% earnings growth among S&P 500 companies in 2019. Now that forecast has been reduced to just 2.5%. “The question to focus on now: Has the market overshot to the upside in the first month and a half of the year, or have earnings shot too far to the downside? Or a little of both?

Wal-Mart (WMT) reported fourth quarter sales and profits that beat Wall Street forecasts. Details contradict the Census Bureau’s recent Retail Sales report for December. Wal-Mart’s same-store-sales accelerated to 4.2%, a full percentage point higher than expected. Store traffic rose .9% and average ticket rose 3.3%. Online sales, which the company has worked hard to build, rose 40% from year-ago levels. Management said it expects US same-store-sales to grow 2.5% to 3% this year. The stock is up 3.7% today.

The National Assn. of Homebuilders’ (NAHB) Housing Market Index rose to 62 this month vs. 58 in January. This is the second-consecutive month of gains for the index, which measures sentiment among business leaders in the home construction industry. Housing has cooled off due to rising mortgage rates, low inventory of for-sale homes, and low affordability. And while unemployment is very low, wages are still growing at a slower rate than home prices. This index has been in a downtrend for a year now. Bloomberg says the turnaround in NAHB could be due to a more dovish tone from the Federal Reserve, as interest rate expectations for 2019 are now lower.


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