March 8, 2015
Weekly Market Outlook
By Keith Schneider
The markets ended the week with a huge sucking sound, one that sounded like a lot of equity pouring down into the ever increasing mysterious Siberian craters. Of course that equity just followed what was already sinking into that hole-- anything Russian. After hitting new all-time highs this week, the US equities markets stalled, lost altitude and then had a 1.5% drop on Friday.
The downdraft took no prisoners as bonds, gold, oil, and stocks all went down in unison. The sea change that cratered the markets was the excellent US Non-Farm payrolls report. The abnormal normal that has been pervasive in the market since the great 2008 (even before, starting with Greenspan puts) meltdown seems to be reverting back to a more typical normal. Now that is a sea change... A robust unemployment number, decent GDP and low inflation. It’s not a bad climate. Even Walmart has raised its minimum wage to a huge $10 bucks an hour. It’s either an altruistic move or maybe an indicator that the economy is actually improving and Walmart needs to up the ante to attract and keep its workers. Your call.
So, it’s not unexpected that the initial reaction to the NFP numbers and the prospect of higher rates would unnerve markets. Stands to reason that all the players who had been retrained to love zero or negative short term rates as a fix to an ailing economy, now have to be rethinking what firmer rates really means in the new paradigm.
As long as low inflation does not turn into deflation, expect firmer rates. Firmer rates and a normal environment should be good for the markets after some digestion period. The old adage of three steps and a stumble is still true but may need to be modified. Generally, after successive rate hikes by the Fed, the market gains are muted or negative, but with zero rates we have two conflicting thoughts. Does a reduction in easing count as a rate raise? Or, is it more that with rates zero or negative, getting back to a real rate of return is barely on the horizon and the stock market should be able to sustain much higher rates before money really floods from stocks into bonds.
Just how much havoc will the climate change wreak on the markets before they gain their footing? At the moment, Friday’s big sell off put some of our short term indicators close (not yet) to oversold, with some of the longer term readings just getting going. A short term bounce not far from these levels and then some additional weakness seems in order. The SPY took the biggest hit and looks weakest and heaviest, while the other major stock indexes and especially the QQQs, still look pretty firm.
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