Insights & Advice

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Back to Square One

Mixed economic signals once again kept the markets in check during this holiday shortened week. The averages moved up and down in slow motion with most of the gains and losses posted in the first half hour of trading each day on low volume and with even less conviction. Second quarter earnings begin next week and maybe, just maybe the markets might finally break out of their trading range but which way, up or down? That may depend on how investors perceive company results.

Thursday, we experienced a deep sell-off that drove the S&P 500 Index back down to the 900 level, approximately 30 points below its level at the beginning of the year. The Dow Jones fared no better and is now almost 700 points below where it began the year. Only the tech heavy NASDAQ market has done better gaining 170 points or about 10% for the year.

Ostensibly, investors were disappointed by the latest unemployment data: 467,000 jobs went down the tubes which pushed the unemployment rate to 9.5%. We have now lost more jobs than anytime in the last 26 years. And even before U.S. markets opened, European markets were already down more than a percent as the Euro zone jobless rate also hit 9.5%. Given that the world’s stock market rally since March has already priced in an early recovery, any departure from that expectation will be most likely be met with sell orders.

Throughout the week macroeconomic data continued to surprise the markets, sometimes pleasantly as in housing starts and manufacturing orders and then negatively as housing prices dropped 18% nation wide and job losses continued to mount.

“Given that expectations of at least a 10% unemployment rate has been talked about for months, why should the markets react so violently to today’s number?” asked one mystified weekender who called me from his cell phone on his way to his house in the Berkshires. He was planning to spend the long Fourth of July weekend in blissful solitude.

I tried to explain to him that the markets have been biding their time for well over a month waiting for evidence that the recovery has truly begun. Numbers like today’s unemployment rate seem to refute that notion. What many fail to understand is that we may very well be on the mend but recoveries take time and are a process, not an event.
First we see a lessening in the rate of decline in areas like housing starts, auto sales, unemployment, etc. That does not mean that we should expect the rate of decline to lessen each week, month or even quarter like clockwork. There will be numbers that seemingly contradict the trend, like todays. Unfortunately markets these days are so attuned (thanks to instantaneous media reporting and analysis) to every number and statistic that is announced that volatility is higher than it has ever been even on quiet days.

Think about it. Just about everyone knows that these macroeconomic statistics will be revised up or down over the next few months and sometimes these revisions are huge and in the opposite direction of the initial number. Yet, today’s traders couldn’t wait to sell down the market averages by 2.5% in less than an hour. Take oil prices as another example. Weekly numbers report inventory levels of various types of oil and gas can easily move a barrel of oil by $3-$5/BBL. However those numbers have little if any impact on the fundamental long or even short term demands for energy in this country.

You see, my reader, we live in a trader’s market where investing has gone by the wayside and speculation has become the norm. Is it any wonder that $9 trillion in investment funds sit in cash as the volume in today’s markets continue to dwindle? Until some perspective returns to the stock markets, I advise readers to stay where they are in income and defensive funds until some real signs appear that this market is going higher and that this period of speculation has come to an end.

Posted in A Few Dollars More, At the Market