What a difference a day makes!
I have been traveling on business for the last few days, so I apologize for missing the daily commentary. While a lot may have SEEMED to have change, nothing really has. The latest jolt to the market bringing pressure came from an ASSUMPTION and nothing more.
What a difference a day makes!
Just last Thursday the general concsensus nad bee the Fed would NOT be raising rates anytime soon. The market had been rallying strongly since Yellen confirmed that hypothsis in her Congressional testimoney. Then on Friday we have a far better than expected Labor Report and the market jerks violently as if it was an announcement of a surprise rate hike. What a difference a day makes.
On Friday the Labor Department reported a boom in job creation and a drop in unemployment. Job creation of 295,000 beat the 240,000 expectations and unexpected drop in the U3 unemployment rate to 5.5% fell lower than the 5.6% expectations. If we were to only measure by the headlines, its great news and the market should be roaring higher – the economy is booming or is it?
The great economic news could mean bad news for the markets, because if we are to believe the Fed will react to the economic data like jobs and unemployment, it could mean they would END their uber easy accommodation and start raising rates.
The market has a bad habit on only paying attention to the headlines and also ignoring what the Fed actually says. It only takes one big economic headline to send the market knee jerking higher or lower and Friday was a perfect example of that. You know what they say about assumptions.
Courtesy of the WSJ
Let’s review the Fed first. Yellen in her December press conference said the Fed would NOT be raising rates in the next couple of meetings, which means NO rate hikes in January or March, if we are to believe her. Then in the January FOMC meeting they released a continuing “dovish” statement and indicating they would not be raising rates any time soon. Recently in her Congressional testimony she reconfirmed that the Fed currently remains accommodative and wants to see how the economy progresses before raising rates, even went as far as stating they would NOT be raising rates for SEVERAL meetings. If we add that to all the recent lectures and interview with other Fed governors since the start of the year, there are additional concerns about deflation (strong dollar) and some have indicated we haven’t had enough accommodation, which collectively are the opposite of any rate hikes. The market has rallied since the Fed confirmed that they would remain accomodative.
We all know the Fed has removed the U3 rate from their FOMC statement as the official measure of unemployment for making policy decision. With the Fed tossing it out as a consideration for setting monetary policy, it means that it has strictly become political window dressing and further removed from any accurate measure of unemployment unfortunately. I will dispense with my usual detailed review of the data, as it has become a futile and exhaustive mathematical exercise – and only of interest to those that want the facts rather than just headlines. The Fed’s exclusion of it for setting policy should be enough proof of its idiosyncrasies.
ADP Private Sector ignored
What of the job creation? Well that too has been far murkier than the headlines would suggest, with inclusions of part-time and other machinations. Of course it depends if you measure job growth using the Household or Establishment survey, which report radically different results from one another – but the Labor Department uses both. Ironically the ADP National Employment Report of private sector jobs, just days before the government’s official labor report came in weaker than expected with only 212,000 jobs, expectations were for 220,000 jobs.
Courtesy of ADP
What did Friday prove?
First, the market still knee jerks to headlines as the media purport them as facts that trump other private sector economic data. Second, the vast majority would rather not bother with the math behind the headlines. Third, it is obvious that the market doesn’t care, has forgotten, or doesn’t believe what the Fed has made abundantly clear about their policy.
The market moves from headline to headline, living in a 24-hour news cycle and quickly forgets history – even as recently as the Fed’s February Congressional testimony. Remember after that – the media pundits all believed we would NOT raise rates this year.
Friday also proves that the market is heavily dependent on the Fed’s monetary policy. QE has ended in name only, as the Fed continues to buy bonds, buy mortgages, increases the monetary supply, and keeps rates at zero. Beyond the headlines the market KNOWS this, has become addicted to it, reliant upon it, and wants it to continue. Raise rates and end accommodation means that you end growth based on margin and leverage.
Keynesian Economics Chugs along
The nation assets are growing NOT on EARNED income, just look at wage growth which is stagnant. The assets are growing because of margin (leverage, borrowed money). If we agree that asset growth is primarily built on margin, and the margin growth rate is based on part on the cost of money (interest), if you raise rates then what should happen to margin growth, and subsequently asset growth?
The Keynesian economic theory is alive and well, it has fueled the greatest and most accelerated boom in our financial history. It has created the perception of economic recovery. While I would agree there are some real areas of growth and some great growth opportunities, I would also tell you that overall asset value acceleration is based on the ability to borrow and the cost of money.
Lord Maynard Keynes, the father of Keynesian economic theory which the West has practiced to some degree or another since the Great Depression, is based on borrowing money to fuel spending to fuel growth. At its core it is fueled by debt.
Courtesy of wikipedia
While I disagree with the extent in which we have adopted this economic theory (nation debt rocketing about 17 trillion, consumer debt, Freddie and Fannie debt, etc.), there is one thing I think we can all agree with – which he said so eloquently (sarcasm noted), “In the long run we are all dead!”
Keynesians take this to heart – debt doesn’t matter if in the long run we are all dead. I guess it is our grandchildren’s problem and if they have any Keynesian wit about them they would borrow more and shove it onto their grandchildren.
Personally I find it sickening, but that is the economic theory that the West has adopted. The unfortunate realization of this debt and spend game, is that each time you need to borrow more and spend more. The bubbles it bigger and the crashes get bigger. What will the Fed do that next time?
Sadly, for anyone that studies the HISTORY of economics and money – knows that Keynesian theory is not new. It was alive and well during the Roman Empire and how did that work out?
The market is nervous, reliant on Fed’s easy money policy, and can quickly turn on any news or perception – regardless of accuracy.
Support & Resistance
We had a good pull back on the great Labor Report, which assumed the Fed would raise rates. If it can’t hold I think we could see 17,600 as the support area. I suspect that we consolidate in this area for now.
The tech sector has been on a solid charge since mid-February. I think we could see a little consolidation before another move higher or lower. Look at 4400 as a broad consolidation zone, with a low support in the 4350 area.
SPX 2060 – 2080
This is the broad consolidation range the broader market should remain in until the next FOMC meeting on March 17-18. The VIX was down in the very low level – suggesting that market was getting a little frothy in the short term. It popped the other day into the high 15 range and could stay in here until the FOMC meeting.
The Russell is in a pivotal support level and the rest of the market will follow. If we can get a support in this area and start consolidating prior to the FOMC meeting we could set-up for another run higher. However if we see order flow out of equities, the RUT could break down to 1200 and that means the rest of the indices will see a short-term continued decline into the next FOMC meeting. Watch the RUT to gauge order flow and general trends.
Words speak louder?
What a difference a day makes. It seemed only yesterday the market and the media were purporting the Fed would NOT be raising rates anytime soon, even the Fed said as much. Now one data point latter and everything has taken a 180 degree turn and now some are saying the Fed could raise rates very soon.
History has shown that even if the Fed would be raising rates, they would not do it in a knee jerk fashion like the market reaction to the Labor Report.
What will the Fed do and what is in store for the next FOMC meeting? I think it will be more fluff and talk, with nothing changing. The media will again focus on phrasing and read the tealeaves. While this will certainly could inject short-term volatility in the market and drive perception, the long-term is just more of the same.
Actions speak louder than words, but gauging from market reaction you would never know it.