Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Eyes on the Dollar…
Given the multitude of information that hit the markets this week, and the limited amount of space on this page, we think a bit of summarizing may be in order.
Stocks were firm, with many indexes pushing into all-time-high territory. At the same time, the economic data, though celebrated for “beating expectations,” clearly failed (again) to support the notion of an impending economic recovery. This could also be said of corporate first-quarter earnings. Although they showed some improvement from the previous quarter, they lacked any meaningful revenue growth to match it. All of this is to say that stock bulls are happy – in an irrational sense. With an economy having yet to fire on all cylinders (here or abroad), there is little chance that central bank stimulus will be withdrawn any time soon. Remarks made by the ECB and the Fed this week strengthen this assessment.
Treasuries came under a bit of pressure following the US jobs report on Friday. New non-farm jobs registered 176,000 for April, while revisions to March were noticeably positive – increasing by 59,000 to 154,000. The April unemployment rate fell from 7.6% to 7.5%. Beyond the headlines, everything seemed to be in order, as the overall labor participation rate remained steady. Somewhere in the mix, though, 206,000 fictitious Birth/Death jobs were credited to non-farm payrolls, while U6 – a more accurate measure of the total unemployed (including discouraged workers) – actually rose in the month of April (from 13.8% to 13.9%). Add to this the disappointing (on all counts) ADP jobs report released earlier in the week (119,000 vs. expectations of 150,000 for April), and there wasn’t much evidence supporting the consensus that a positive trend in job creation is forming.
As we said last week, much will depend on the trajectory of the U.S. dollar. Over the last few months, it has defied gravity – in relative terms only – while the Fed has actively and aggressively debased to the tune of nearly half a trillion dollars. If the US dollar can remain strong over the next few weeks, then the current blow-off pattern in stocks may continue for a while longer. On the other hand, if the dollar’s recent inability to rally above its 50-day moving average is an indication that future inflation expectations are on the rise, then some “religion” may return to the bullish paradigm, subsequently calming the equity markets.
The precious metals may already be discounting this scenario, since they have not been obediently declining on days when the spin surrounding the economy and stocks is at full throttle. With that in mind, we maintain that the $1,550 level for gold is within reach, perhaps as soon as next week, while stocks may proceed further, but with rapidly increasing vulnerability and instability.
VP Investment Management