Stocks opened slightly lower this morning. The Dow is currently down 50 points and the SPX is down .1%. Financials (+.3%) and industrials (+.5%) are bouncing back from yesterday’s declines. On the other hand, healthcare, energy and real estate sectors are in the red. WTI crude oil fell back to $63.50/barrel in early trading. Most other commodities are down as well, partly due to a strengthening US dollar. Bonds are also trading lower as yields tick higher. The 10-year Treasury yield bounced back up to 2.49%. Only junk bonds are holding flat.

The S&P 500 Index (SPX) is now within 1.7% of its all-time intraday high set back on October 3, 2018. Investors are grappling with the question of how much farther can it go? Has the stock market recovered too far, too fast? Or are we just seeing a continued grind higher in reaction to a more dovish Fed and the fact that the economy hasn’t deteriorated as much as investors expected? Jim Paulsen of the Leuthold Group says everything depends on whether we have an economic recession some time soon. Despite a very positive market trend this year, he warns us that “just under the surface is a lot of fear.” Recession bear market fears could return very quickly, causing a sharp pullback. That’s the main risk. However, his base-case expectation is that the US economy will not fall into recession in the foreseeable future. And “if the economy stays together, then the market’s going to keep going higher.” In this scenario, we will continue “climbing the wall of worry.” Hedge fund manager Peter Boockvar, however, says stock investors are ignoring very negative signals from the bond market. That is, a flat yield curve and very low bond yields suggest economic growth won’t be strong. “I think we’re in a slowdown that’s not just temporary; I think it’s something that’s going to last throughout the year.”

Ned Davis economists believe they are seeing early signs of a stabilization in global economic growth. In a research note, Alejandra Grindal points out that manufacturing PMIs around the world improved in March after 10 months of declines. PMI is a general term referring to an index measuring business activity. “The risks appear to be alleviating, although it’s not 100%.” Ms. Grindal says PMI data usually bottom out four to eight months “before the next expansion begins.” She therefore believes global economic growth will improve in late 2019. Certainly, global stock markets are predicting this. The Euro Stoxx 50 Index is up 13% this year; the Shanghai Composite Index is up 30%; even Brazil’s Ibovespa Index is up 7%.

The Producer Price Index accelerated in March due to rising gasoline prices. Wholesale US price inflation climbed to 2.2% in March from 1.9% in the prior month. However, stripping out the more volatile categories of food and energy, Core PPI slowed to 2.4% from 2.5% in the prior month. That’s the slowest rate of price growth since May 2018. The step-down in economic growth from 3% last year to roughly 2-2.5% this year is keeping a lid on inflation. But here again, inflation readings are Goldilocks-ish: not too hot, not too cold. They’re not decelerating enough to make us worry about falling economic growth, and they’re not rising enough to make us worry about the Fed raising interest rates.

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