Research & Advice


Noise in, noise out

The market did another round trip on investors this week, testing both the lows and the highs of the recent trading range. At some point, the markets have to break. The only question is will the break be to the upside or the downside?

There were a number of sharp moves in global bonds and currencies that drove the markets down earlier in the week. First, a sudden increase in European interest rates, especially the German Bund (Treasury bond), that saw rates rise from 0.059% to a high of 0.079%. That might not seem like much to you and I, but it was the fastest rate of change in German yields in a generation. That caused a domino effect on other bond yields, including here at home.

The ten-year U.S. Treasury note (the benchmark interest rate investors use to gauge the bond market), rose from under 2% to 2.26%, the largest rise since February. Immediately, bond bears called the move “the beginning of the end” for bonds (for the 100th time in two years). That caused investors to dump equities, and not just here in the U.S., Europe, China, Japan and the rest of Asia took it on the chin.

Then there was that Yellen statement. Asked a question at an economic conference on Wednesday, Janet Yellen, the chairwoman of the Federal Reserve Bank, said that stock prices “are still quite high,” Investors did not take kindly to her comments. Her words simply fueled further market uncertainty and triggered talk of the possibility of further downside in stocks. It drove stocks down to the bottom of the trading range.

Thursday, stocks turned around before the opening and never looked back. Friday’s U.S. job report, which came as expected (with 223,000 jobs gained and a 5.4% unemployment rate), was simply an excuse to take stocks back to within 12 points of the record high on the S&P 500 Index. Why do I believe all of the above is simply noise?

Let’s start with the job number. The Bureau of Labor Statistics, in compiling their numbers, tells us that there is a 90% chance that the nonfarm employment number is within 105,000 jobs of the estimate. That means the number can be inaccurate by as much as 47% on any given week. All you can really say is that there is a 90% chance that jobs did grow this week.

Traders are looking beyond the jobs number to the increase in the hourly wage. Fedheads think that the Fed is tracking this number as a future indication of upward wage pressure. Rising wages, so the story goes, would mean higher inflation and give the Fed the pretext to hike interest rates sooner than later.

Once again, however, that number is at best a guestimate, because the hours American laborers work per week are constantly changing and is never the same month to month. At best, all you can say is that the trend might be higher. And yet billions of dollars are won or lost in a day based on statistics that will be revised again and again.

As to the gyrations we’ve seen in interest rates this week, my opinion is that European interest rates simply declined to an absurd level and a snap back was entirely predictable. Asian markets, on the other hand, have been on a tear and were badly in need of a pullback. That has now occurred, setting those markets up for further gains.

As for the U.S. markets, at some point stocks will most likely break out of this trading range, but it might not be for months. We are entering the summer season when gains have been modest over past years. Chances are we continue to meander. But even if we do have a pullback or a melt up, I wouldn’t change a thing.

Posted in A Few Dollars More, At the Market