Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Who Needs Stimulus When We’ve got the BLS?
For most of the week, stock markets worldwide were in disrepair. Asian and emerging market economies struggled in conjunction with failed stimulus policies stemming from China. Europe grappled with an escalation in Ukrainian tensions, Greek non-performing debts, and several soft economic data points. August EU retail sales growth of 1.2% wasn’t the exception, and was mostly driven by a rise in gas prices caused by euro debasement. Much of the US economic data was similarly pallid – including the recently touted Purchasing Managers Index (PMI – indicating the health of the manufacturing sector), construction, factory orders, and consumer confidence figures that slipped leading into and during the month of September.
However, much of that didn’t seem to matter when the well-hyped and seemingly well-polished US non-farm employment report was released Friday morning. It showed the creation of 248,000 jobs against 215,000 expected. In addition, the unemployment rate dropped to 5.9% and the Birth/Death model actually contracted by 26,000. These indicators were interpreted as a precursor to Fed interest rate hikes – and sooner rather than later. Due for a bounce anyway, that was all stocks needed to hear (despite the fact that the jobs report contained the usual fleas – 315,000 workers left the labor force, which was substantially more than were added). The participation rate in stocks fell to a 36-year low of 62.7%.
Stocks then made every attempt to eradicate their losses from earlier in the week – which at last glance they appeared to be having some success in doing. However, Treasuries stayed firm into the close Friday, which by all accounts is representative of a defensive bias as we move forward. As to dollar/gold theatrics, the greenback fell initially on Draghi’s failure to launch QE, but then jolted to a new interim high (probably due to short covering) after the jobs report hit. Gold fell again, though in measured steps, dipping below the $1,200 mark into previously held support levels.
As many have surmised, an epic battle is going on between those who believe the economy is self-sustained (without the Fed) and those who know the economy and markets will crater in short order without them – which incidentally is happening in some areas of the market (e.g., small caps and energy). So far, however, spending of sorts via creative financing (i.e., leverage) has given the appearance of a self-sustained environment. Without the Fed (and/or foreign creditors), however, that trend also has its limits. All of this is to say that, away from the occasionally hyped jobs report or something of the like, the risks are rising in all directions – something that falling Treasury yields (from highs set last year) have been discounting for some time now. Expectations of QE will likely resurface sometime soon, but if for some convoluted reason the Fed persists in its hawkish stance, you can add credit risk to the list of things to be concerned about – as is now once again the case in Europe.
VP Investment Management