This week was a little more promising. At least it was better than going down almost every day, as we did last month. Is this a pause or can we expect something more?
Something more is my bet, but whether it is up or down largely depends on the direction of oil. I did notice, however, that there were days this week that the oil price was not in lockstep with the markets. There was even talk that stocks and energy prices might decouple in the weeks ahead. Whether that is wishful thinking or a possibility will take more than a day or two of evidence.
I have insisted that no one knows where the bottom is in oil. Yet, a consensus seems to be forming that $30/BBL., (give or take a few dollars), is where traders are willing to take a punt and buy energy. That may be true and I hope it is because that would mean the downside for stocks are limited. I still expect the S&P 500 Index to re-test its low of January. That would set us up for a nice rebound into March, but so far it has not happened. Instead, it appears we have established another trading range between S&P 1,875 and 1,920. We are close to the low end of that range right now.
Investing is a game of patience. Most of us do not excel when it comes to practicing that virtue. We want the pain to go away now. It is most tempting to just get out, but the truth is that the pain is simply replaced by a high level of emotional stress. You feel an increasing level of anxiousness as you worry about when to put your money back in the markets.
In the meantime, the daily “noise” continues. There is an increasing chorus of “recessionists,” who worry that the economy is rolling over and it’s all the Fed’s fault. The January jobs report today did nothing to dispel that gloom. Nonfarm payrolls increased by 151,000, well below expectations of 190,000 new jobs gained. The unemployment rate did drop however to 4.9%.
Recall that I have been closely watching the rate of increase in wages. It is an important inflation variable for the Fed in deciding when and how much to raise interest rates. Average hourly earnings increased by 12 cents or 0.05%. That leaves the year-on-year wage gains rate at 2.5%, still far below the average. I doubt the Fed will hike rates until that number goes appreciatively higher.
Investors, however, are in an irrational state of mind where bad news is bad news and good news is also bad news. And so the disappointing jobs data forced markets lower. You would think that if traders were really worried that more interest rate hikes would hurt the economy, than weak employment data should have been good for the market. It is just another instance of a technical driven market.
One thing that I will be watching this weekend is China’s expected announcement of their foreign exchange reserves. Supposedly, China’s currency, the Yuan, has seen over $1 trillion in outflows since the summer of 2014. Chinese investors, worried about their economy, have been fleeing the Yuan. They have been buying other currencies, especially the dollar, which they believe is a safer haven for their money. As a result, the dollar has strengthened and that’s bad for our exports and the companies that sell them.
If China’s FX reserves fall below the consensus numbers, global markets could feel the heat next week. Since it is Golden Week, a traditional holiday in China, their markets will be closed, so it will be the rest of us that will be left holding the bag. On the positive side, if China’s reserves are higher than expected, it would be a signal that all is not as terrible as the pundits would have us believe. That could trigger a sharp spike higher in the global markets.
All-in-all, we are overdue for a rally, even if it is a dead-cat bounce. It is way too difficult to make a definitive statement that markets will rally next week. Unfortunately, we are not out of the woods quite yet.