DRIFTING AIMLESSLY, LOOKING FOR A CATALYST

Stocks opened mixed this morning, looking for a catalyst. The Dow is currently down 25 points and the SPX is flat. By the way, the SPX is now up 18% so far this year, trading at a P/E ratio of 17. Most investors believe the index is at fair value and so a meaningful catalyst is necessary to push it higher in the near term. Unlike yesterday, defensive sectors like utilities (+1%) and consumer staples (+.4%) are leading the way. On the other hand, energy stocks are down on oversupply concerns. OPEC decided to extend current oil production limits through March 2020 because the global economy is weakening. Tighter control of crude supply will help prop up oil prices. Today, WTI crude oil fell back to $56.90/barrel. Bonds are trading slightly higher again today as yield creep lower in anticipation of slower economic growth and expected Fed rate cuts. The 10-year Treasury yield is back down to 1.98%.

JP Morgan’s David Kelly says the US stock market is in a “happy mood.” Stocks are heading higher for two reasons. First, long-term interest rates are so low that “there is no real value in the bond market.” So investors don’t see an alternative to stocks. Second, the trade war is hurting global manufacturers, but not nearly as bad in the US as in the rest of the world. We’re the “best house in a deteriorating neighborhood.”

According to the National Bureau of Economic Research, we are now experiencing the longest economic expansion in US history. The last recession ended in June 2009 and since then the economy has grown by 25%. One key reason for this cycle’s longevity is its measured pace. Economic growth has averaged about 2% per year, which is much slower than in past cycles. Most economists blame the housing crisis and near financial meltdown for the muted recovery over the last 10 years. Economic growth accelerated to about 3% last year, driven by government stimulus (tax reform), but economists are generally predicting a deceleration to around 2.0% to 2.5% this year as a result of the trade war. But while growth is slowing and geopolitical uncertainty is rising, few see concrete signs of an oncoming recession.


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