Here’s this morning’s entry to our internal market log:

5/15/18 (Tuesday)

After 8 up days in a row, the Dow is off ~200 points this morning. Headlines say it’s Home Depot’s earnings miss and positive econ data pushing up interest rates.


The positive run (until today) is due to a combination of bullish earnings/outlooks and much friendlier rhetoric around trade.

This morning has virtually nothing to do with Home Depot (weather explains Q1 as it typically does, and they maintained their outlook going forward), and everything to do with the following:

1. The U.S. economy is doing notably better than other developed economies. Thus, the dollar is on the rise (as PWA – against the consensus view — anticipated at the beginning of the year).

2. U.S. interest rates are higher than most other developed markets, also boosting the attractiveness of the dollar.

3. Traders know that the U.S. will be stepping up treasury debt issuance to pay for tax cuts and the big budget. In a world where central banks are either moving to neutral or tightening mode, a major source of buying is drying up. Thus, rates have to rise to attract demand. Trade tensions would only make matters worse.

4. The market is going through a weaning-off-of-low-rates period that virtually assures heightened volatility while the focus shifts to the fundamentals of an accelerating economy, its attendant inflation, and the prospects for sustained earnings growth.

Bottom line; the economy is currently better than good, but different than it’s been for a very long time. The good economy (bullish general conditions) demands patience among equity investors as the market contends with higher interest rates for now, and mid-term elections in the months ahead.

Note: Financials (our largest sector weight) are actually up a bit this morning, while bonds and gold are getting creamed (as we’ve been expecting they should)…