CALM PREVAILS…FOR NOW
The major stock market averages opened higher today. The Dow is currently up 112 pts and the SPX is up .25%. Semiconductors, pharmaceuticals and retailers are among the best performing. On the other hand, REITs and banks are in the red. Now that the stock market has retraced more than half of its late 2018 correction and the VIX Index has fallen back to 15, traders are wondering whether the recovery is running out of steam. And there is a case to be made for a little consolidation after a very strong January. The dollar is stronger vs. a basket of foreign currencies today after some weak economic data out of Europe. So far this year, the dollar is flat. Not surprisingly, oil is falling back after a strong run from $42/barrel to $55/barrel in just five weeks. WTI crude is currently trading around $54.10/barrel. Bonds are trading higher on the day. Junk bond ETFs are up about .4%, high-quality corporates are up about .4%, and long-term Treasuries are up about .4%. One doesn’t normally see Treasuries rising in price right along with the stock market.
Some key US business activity surveys were released today. ISM’s non-manufacturing index sank to 56.7 in January vs. 58.0 in the prior month. Bloomberg hastily points out that while this index “fell more than expected in January…the decline should not raise alarm bells that a significant slowdown is underway.” Why? First, January data was likely distorted by the government shutdown, which is now over. Second, as with any PMI data, readings above 50.0 indicate expanding business activity, which is good news. So while it is true that activity has slowed from a very fast rate of expansion in 2018, the current lower rate is still healthy. The forward-looking “new orders” component of the index fell back to 57.7, but that’s still considered very strong. Separately, a similar US Services PMI published by HIS Markit Economics held steady at 54.2 in January. The message is similar: the economy has stepped down from last year’s torrid pace of growth, the but the bottom isn’t falling out.
About 260 of the S&P 500 companies have reported fourth quarter results. About 59% have beaten Wall Street revenue forecasts and 74% have beaten earnings expectations. Those beat figures are good enough to bring investor sentiment back from abject depression. Today on CNBC, Joe Terranova sarcastically noted, “We survived the great recession of Christmas Eve 2018.” And it is true that commodity prices are rising again, the Fed is more dovish, junk bonds are recovering, and economic data hasn’t tanked. The fact is, things just aren’t as bad as investors feared back in December.