How The Views Of Wall Street And Main Street Differ
Market
Trend: Up
Market Outlook:
Bullish/Navarro; Bearish/Aloyan
Sector Watch: Broad markets, telecom,
internet, and chips (+); Housing, mortgage, manufacturing, retail (-)
David’s Pick:
EWF (European Warrant Fund)
Peter’s Pick: DSLN
The Broad Market Outlook: Is A
Jobless Recovery Actually Bullish?
Friday’s super-surprise with the jobs report certainly gave a boost to
the bond market even as it spooked stock market investors. It will be interesting
to see whether this news actually provides the catalyst for the long-awaited
correction and the week will certainly begin with some trepidation. But just
for the heck of it, let me try and make the argument that a jobless recovery
is actually good for this particular stock market. Before we do that, let me
trace the bearish logic of what happened Friday.
1. The jobs report comes
in with a meager 1,000 jobs created, instead of the expected 150,000.
2. The bond market interprets this news as evidence that the Fed will postpone
any rate hike and the Fed funds futures rate goes in to pricing a rate hike
by Summer at 100% to something more like 60%.
3. Money floods into the short end of the bond market, driving prices up and
yields down.
4. Stock market investors interpret the news as a possible sign of weakness
in the economy and decide to both move some assets out of stocks and into bonds
(the asset allocation effect) and take some profits off the table, and the Dow
loses over 100 points.
5. On the long end of the yield curve, investors likewise interpret the news
as a sign of possible weakness and buy at the long end to lock in current yields.
Prices rise and yields fall.
6. Meanwhile, the dollar weakens on expectations of continued low interest rates
from a relative interest rate effect.
OK, that’s the short
run. Now let’s think about the whole idea of a jobless recovery from a
longer-term perspective leading up to the November Presidential election. Here’s
the bullish scenario:
1. Unemployment stays a
percentage point or two above full employment but doesn’t rise to any
worrisome level — at least from Wall Street’s point of view.
2. This allows the Fed to continue with a regime of low interest rates that
fuels the recovery.
3. Lower interest rates put further downward pressure on the dollar, which lifts
exports and helps balance the trade deficit.
4. Continued unemployment allows the Democratic Presidential nominee to campaign
against Bush on the issue. The presence of such a jobless recovery increases
the chances that Bush will be upset by a Democrat.
5. The bond market reacts to this new political calculus by keeping yields low
than they otherwise would be, because they know that a Democrat would repeal
part or all of the Bush tax cuts and do a better job of balancing the budget.
6. The stock market likes the prospect of a balanced budget as well, because
it keeps a cap on interest rates.
My punchline is simply that
in the new world we are in, a jobless recovery per se is certainly
not going to derail the nascent bull market. In fact, it may actually provide
the conditions for this nascent bull to fully bloom. It’s just one more
example of how the views of Wall Street and Main Street differ. Stay tuned.
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The big news is going to
be in the earnings reports this week. All signs point up — but any big
disappointments will have a big negative impact on the markets.
The economic data reports are back-loaded towards the end of the week, and the
CPI-PPI numbers will be watched closely for any signs at all of incipient inflation.
Me thinks there is more inflation afoot than the data has been showing, particularly
in commodity prices. But we shall see.
Given last Friday’s job data debacle, Thursday’s jobless claims
will be watched closely. Consumer sentiment is always interesting — the
concern thus far unsubstantiated is that debt-laden consumers without their
refi fixes available at some point have to retreat.
Up: The
Broad Markets—