If you told me three months ago that oil would be trading through $70 and the ten year Treasury would stick its ugly head through 3% all in one day, I would tell you that we'd be down 5% that session. That's just a powerful lot of bad news for the market back then to take.
But today oil soared, interest rates went higher and the market cheered. What the heck is going on?
First, let me go back to my initial supposition about interest rates. I have said over and over again that a 3% yield is not something we should fear. It's something we should embrace because it shows you that the economy's doing better. If interest rates never went higher, if things stayed anemic, then we would be in very big trouble.
But the problem is that so many portfolio managers only know low rates because of how young they are that they simply don't get that a 3% ten year Treasury's pretty darned low. I am not saying it's a sideshow. There was too much money triggered to sell if rates went to three that we had to endure the torture.
However, it was never the level of rates that mattered. It's the level of rates versus the economy. If the economy is weak and rates go higher then that's just plain bad news and signals that there's inflation in the system.
If the economy is strong though, and there's little to know inflation then it is natural that rates go higher. That's what we have. Remember, the most important single indicator of the economy is the Labor Department's non-farm employment report and last week's employment report was about as perfect as you can get. We had excellent job growth but not a lot of wage inflation. Or to put it in a way that actually makes sense, jobs are plentiful but so are the people to fill them so, for the most part, they aren't getting raises or being paid more. Then, today, we got a producer price index that was lower than expected, confirming the labor department's nirvana report.
So a 3% ten year in that environment doesn't wreck the market.
In fact, it provides precisely the leadership that the stock market is looking for: the banks.
There are always plenty of candidates for leadership. For much of the last few years the leaders were FANG, which is why we coined the darned thing: Facebook (FB) , Amazon (AMZN) , Netflix (NFLX) , and Google, now Alphabet (GOOGL) . These all went up today. More on that later. But what really matters is that in previous markets these stocks were basically zero sum. When they went up everything else went down.
But after Washington passed tax reform, the leadership broadened to include the industrials, the tech stocks away from FANG, especially the semiconductors, and the banks.
One by one, though, we lost all of these leaders. When the market peaked at the end of January the banks stocks got crushed. Then the industrials and the semis got scalded by the decision by President Trump to put tariffs on steel and aluminum. The smart money knew that these were aimed at China and China's hugely important for the industrials and the semiconductors. There had been a huge wave of mergers going on in semis and the Chinese immediately retaliated by challenging a huge merger, Qualcomm (QCOM) buying NXP Semi (NXPI) .
Without industrials, techs and banks, our leaders became the oils. After years of underperformance these stocks became the best stocks in the books.
But with interest rates going higher, it's time to flip the baton to the banks. Sure there's still enough money to keep the oils advancing. Still, though, with the 3% barrio breached the money flew into JP Morgan (JPM) , Bank of America (BAC) , and even Wells Fargo (WFC) , historically fantastic leadership.
Now, how do we explain the rally in technology stocks and industrials. I think that, right or wrong, there is a sense of optimism about the United States and China working together to try to solve the hitherto totally intractable Korean situation and that's spreading to the industrials that have been the most bruised, industrials like Caterpillar (CAT) and Boeing (BA) that Bob Lang pointed out as ready to roar in last night's off the charts segment.
At the same time Morgan Stanley came out and said enough is enough it is time to buy the semiconductors and identified the stock of Micron (MU) as one of the best candidates for dramatic appreciation because of strength in the data center. I think the combination of that call and the now incredible rally in Apple (AAPL) as the service revenue stream has come to the fore, just is too hard to resist for most managers. It's just too good a story to pass up.
Now I don't know whether President Trump is about to get his way with China. It's just not possible to know. Plus it's not just China that the trade aficionados are worried about. We heard vague rumblings that the NAFTA talks are going poorly.
But I do know that the Morgan Stanley call about semis and the data centers seemed to overshadow any worries about trade today.
I like this call because it actually jives with the fundamentals. Every day I hear about the explosion of e-commerce and the demand that it is putting on the data centers and everything that goes into them.
It's the cloud thesis I talk about endlessly and we are going to hear from it tonight when we talk to the CEO of Etsy (ETSY) , which just moved to the Google cloud, and the CEO of XPO Logistics (XPO) , which has quietly become one of the most important forces in e-commerce shipping.
It's the cloud thesis behind the explosion in digital gaming which Electronic Arts (EA) talked about in last night's conference call, sending that stock up more than seven bucks. It's the cloud thesis dominated the Disney (DIS) conference call as CEO Bob Iger talked about the need to spend more on technology to be able to get to where the new viewers are, the web. It's what's behind the $16 billion acquisition of Flipkart by Walmart (WMT) in order to blunt Amazon from storming the next big e-commerce market, India.
And, of course, it's the technology behind FANG which always goes up if there's a fire lit under the cloud. Don't forget the cloud kings, companies I have endlessly brought to you, companies like New Relic (NEWR) with a stock up 10 points today, or Adobe (ADBE) , VMWare (VMW) , Workday (WDAY) , Salesforce.com (CRM) , Service Now (NOW) , Red Hat (RHT) and Splunk (SPLK) all of which are still worth buying because they are the way you get on to the cloud or use the cloud to make your businesses more productive.
Now of course when rates go higher you are going to get some downer stocks. Today though they were limited to the homebuilders, not a bad quarantine.
The airlines reversed because of the strength in oil, only natural. Plus there are other stocks to be wary of. When you see the defense stocks as strong as they are for a second day don't get too comfortable.
Oh and we got one more reminder of how wrong it is to jump on the huge up opening. As befits the pattern I endlessly chronicle, the market took its usual 10 o'clock nosedive giving you much better prices to do some buying. That bit of tomfoolery has become a 2018 staple. Still, though, the optimism about trade with China is what truly inspires a rally like today coupled with a benign route for rates to go higher. Don't know if it can last, but can we at least put to rest the idea that we have to crash if rates go higher and instead remember this big up day and the renewed bank stock leadership that inspired it?
