Speedbump Coming?

The stock market opened lower this morning. At the moment, the Dow is down 166 points, and the S&P 500 is down .2%. Energy & financial sectors are down 1% or more. Healthcare and consumer discretionary sectors are managing to hold on to gains. Commodities, save gold, are down on the day. WTI crude oil, having gained $22/barrel over the last 3 months, has fallen back to $78.80/barrel. The bond market is trading slightly higher as long-term inflation expectations ticker lower. While the 2-year treasury inflation-protected (TIP) note predicts 3.5% inflation in the near-term, the 10-year TIP sees inflation averaging 2.7% over the long-run. In other words, the bond market seems to believe that most of the post-Covid inflation we’re experiencing is temporary.

Famed stock market strategist Tom Lee predicts a “speedbump” soon. That is, while this market will likely exit the year strong, we may experience a “textbook pullback.” He’ll treat that as a “buyable-dip.” He also says, “people treat 2% drawdowns like it’s an annihilation,” so there is a chance for traders to over-react. If that’s the case, CNBC Contributor Joe Terranova believes the pullback will hit crypto and other recent winners hardest. The dependable, large-cap growth stocks like Microsoft will benefit.

UBS’s Art Cashin notes a rumor that President Biden may nominate Lael Brainard to replace Jerome Powell as Federal Reserve Chairman. Mr. Cashin says Powell is well-liked among investors, so this move could prompt a negative reaction in the market. There is a widespread perception that Brainard is more “dovish” on monetary policy—that is, he favors removing stimulus more slowly than Powell. And at this point, capital markets are clearly signaling concern that continued stimulus will feed inflation even more.

US home starts—ground-breaking on new developments—fell back to 1.52 million units in October vs. 1.53 million. Economists expected new construction activity to surge higher in the month. Apparently, labor & materials shortages impacted homebuilders. On the other hand, the volume of new building permits climbed unexpectedly to 1.65 million. Under-building over the past 12 years, combined with low mortgage rates and strong demand are pushing homebuilder backlogs to record levels. The number of homes currently under construction (1.45 million) is the highest since 1974.