STOCK RALLY EXTENDED, EXPECT TEST OF HIGHS

Stocks opened higher today, extending the recovery rally. The Dow is currently up 75 pts and the SPX is up .5%. The SPX is now only 1.5% away from its all-time closing high back in September 2018. Nine of eleven major market sectors are higher, led by materials, tech and communications services. Only consumer staples and energy sectors are lower on the day. European markets are poised to close about 1% higher and Asia was about the same overnight. China’s Shanghai Composite Index is up about 30% so far this year, suggesting investors expect a trade deal and an improving economic outlook. Commodities are mixed in early trading. Copper is up about 1.2% today; gold and oil are in the red. WTI crude is down .6% to trade at $62.20/barrel. Bonds are mostly lower as yields tick higher. Since falling to a 15-month low of just 2.37%, the 10-year US Treasury Note yield has bounced back to 2.51%. What’s more, the yield curve is steepening a bit. If this trend persists, it could suggest the US economic outlook is improving.

CNBC ran an article yesterday titled, “The Biggest Question for the Market Entering the Second Quarter: Recession or Just a Soft Patch?” Growth is always key for long-term investing, and part of the reason for last year’s 20% stock market correction was a softer outlook for economic & corporate earnings growth. In my view, the recovery rally we’re experiencing now suggests that while growth is slowing, we’re not headed for recession in the foreseeable future. The labor market remains very strong. The trade war hasn’t damaged the economy the way we thought it might. And there have been some recent signals that economic growth in China and Europe may be stabilizing. The technicals aren’t bad either. The NYSE Advance/Decline Line, which measures momentum, is still rising. Also, the S&P 500’s 50-day moving average just crossed above the 200-day moving averages. These are both confirmation signals of recent strength in the stock market. And as I mentioned above, it does seem like the S&P wants to move up and test its September closing high.

This week, research firm ISM released monthly reports on the health of services and manufacturing sectors in the US. The ISM Non-Manufacturing Index fell to 56.1 in March from 59.7 in the prior month. Economists were projecting a smaller decline. This is the third decline in the last four months for the survey. Results are consistent with an economy stepping down from 3% growth to something closer to 2-2.5%. As a reminder, any ISM reading above 50.0 suggests businesses are expanding. ISM notes that survey respondents are “mostly optimistic about overall business conditions and the economy.” We learned on Monday that the ISM Manufacturing Index rose to 55.3 last month, exceeding economists’ consensus forecast. The report’s “new orders” component rose sharply to 57.4 and hiring activity improved to 57.5. Bloomberg says readings this high suggest US economic growth will exceed 2%. This report “provides an important signal of economic resilience amid a slew of data pointing to a soft first quarter.”

Payroll processor ADP says the US economy generated 129,000 new private sector jobs in March, whereas economists were expecting something closer to 175,000. The report suggests hiring activity slowed during the month, but is still at a healthy level. ADP says hiring slowed the most in construction and among small businesses. But Bloomberg cautions against jumping to any conclusions about a softening labor market. “There is little reason to believe this represents the beginning of a new trend. With job openings hovering at record highs and jobless claims at all-time lows, we do not expect this lull to persist.” This report is usually viewed as a preview of the more important Bureau of Labor Statistics’ Employment Situation Report, due out Friday.


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