A Brief Interpretation/Psycho-Analysis of the Market's Action Friday and Today
Just a brief note to offer my opinion on recent stock market action:
The U.S. Bureau of Labor and Statistics released a fairly horrible payroll report early this past Friday morning. The methodology for collecting this data is an iterative process, which means that prior month estimates are continually being revised as more data is collected. Accordingly, Friday’s report contained the first full month estimate of September’s payroll data along with updated revisions for prior months. (You can see the report here: http://www.bls.gov/news.release/empsit.nr0.htm/.) Basically, the report says that fewer jobs were added to the U.S. economy than the market anticipated in September. To add insult to injury, the report also revised down earlier estimates of job growth during the months of July and August. This cumulative downward revision of jobs growth took virtually all market participants by surprise.
As you might expect, the market’s first reaction to this news was to move lower early in Friday’s trading session: The Dow and S&P 500 both traded down approximately 1.6%. What is more interesting to me is the market’s next move --- which was to rally almost 3% from those early lows. And that rally continued today with another +1.85%ish on the Dow and S&P 500. Why would the market move higher on poor economic data, you ask? Great question.
Here is my interpretation/psycho-analysis: The market’s first reaction would seem to be a logical reaction --- bad economic news drives stocks lower. But the “ah ha” moment came when the market realized that more bad news would actually be good news --- in the form of a further delay in the Federal Reserve’s plan for raising interest rates! So, we are back to the tried and true: Bad news is good news theme. Bad economic news implies more monetary stimulus/lower interest rates from the Federal Reserve which provide a tail wind for risk assets. Sound familiar? It should, because this has been the dominant theme driving asset prices higher since the bottom of the market in 2008.
In my last commentary, I asserted that the next major move down in the market would likely result from a reversal of this widespread belief around the world that Central Banks are actually in control of the global economy, that in fact their extraordinary monetary policy is “healing” the global economy. (This is not my own original idea. Ben Hunt of Epsilon Theory has been writing about the Central Bank Omnipotence narrative copiously for at least a couple years.) I believe that when market participants broadly start to doubt that the Federal Reserve is actually helping the economy with its policy --- we will see a massive selloff in virtually all risk assets.
Quite to the contrary, the market action of Friday and today shows substantial continued confidence in the Central Bank Omnipotence narrative. As long as this stays in place, I believe the market will stay anchored to an almost religious hope and trust in our Federal Reserve. This does NOT guarantee positive returns in the markets for 2015 --- there are plenty of things to worry about in the market. However, it is my opinion that a massive bear market is off the table until this narrative changes. Best to be on the look out for this change. My suspicion is that it will occur very slowly --- and then suddenly and all at once.
Which is precisely why at Laureate Wealth Management we focus on diversifying portfolios with investments that don’t require the stock or bond markets to go up in order to make money. Finding investments that are truly uncorrelated with the markets is a very difficult business. And we are passionately convinced that it is essential to do so in today’s global economic environment.
As always, please reach out with thoughts or questions.
Kind Regards,
Jeremy Boynton, CFP®
Founder
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