Here’s the news of the week – and how we see it here at Mcalvany Wealth Management:
Close Your Eyes, Click Your Heels, and Repeat: “There’s No Place Like Stocks”
Stocks used any excuse this week to rally to all-time highs – more because they could (thanks to Bernanke) than because they deserved to. In our view, there are no viable reasons, outside of the January housing numbers, for the records being set in the major indices. The most supportive data emanates from what we would call “opinion polls,” such as data from the Institute for Supply Management or confidence indicators, which have edged up in recent months.
History would tell us that opinions are largely influenced by the action in stocks: As stocks rise, confidence rises. However, the reverse can also be true – as confidence rises, so do stocks – creating a self-fulfilling prophecy. Away from the sentiment indicators, however, we’ve yet to see much to hang such high hopes on – though the hype stemming from the mainstream media seems desperate to convey otherwise.
When it came to the jobs report at week’s end, the usual fanfare was made about the headline number, followed in short order by the usual spike in stocks. 236,000 non-farm payroll jobs were said to have been created in the month of February – much better than January, which was revised downward to 119,000 from 157,000. In the grand scheme of things, 355,000 jobs created within the first two months of the year isn’t all that bad. However, it was much worse than last year this time, where 582,000 jobs were said to have been created. In that light, a crucial question comes to mind: If this is a new growth phase, why is the growth so stunted?
It was also said that the unemployment rate declined by 0.2% to 7.7%, though this was aided by another adjustment to the labor participation rate. That rate fell from 63.9 to 63.5 on a year-over-year basis. Coincidentally, the number of those considered “not in the labor force” has grown substantially since the dot-com crisis of 2000 – rising from 69.4 million to today’s 89.3 million. These are folks who aren’t looking for work anymore, and are perhaps deemed content not to – though the number of people applying for food stamps over the same period of time has grown from 17 million to 47.7 million.
It may go without saying that none of the bad news will matter until it matters. For now, perhaps until quarter-end, the stock market is content to reap whatever gains it can until the data or some other sufficiently large factor prohibits its advance. That said, it’s noteworthy to mention that the bond market has staged a bit of a revolt lately, with 10-year Treasury yields rising to interim highs (see the box scores). We wouldn’t necessarily call it a bear market yet, but the higher rates, also seen in mortgages, have put some unwanted pressure on consumers. In consequence, people have been using credit card debt to compensate for the loss of refinancing opportunities. Consumer credit hit $16.15 billion in January. That’s the highest level on record for the month, dating back more than two decades.
It could be that the bond market is responding to a “perceived” economic rebound, as stocks obviously are, or they could be responding to future inflation expectations. Commodity prices rose this week for the first time in several weeks, with the Continuous Commodities Index tacking on 1.22% by Friday’s close. It’s a small development, we admit, but one that’s likely to gain momentum given the Fed’s plan to expand its balance sheet by over $1 trillion this year.
Metals investors should also find encouragement in the fact that the precious metals did not collapse as stocks rose to all-time highs. It’s simply another data point that would suggest a bottom has been reached, and that commodities (as well as the metals) are ready to price in the inflationary consequences of central bank policies gone wild.
Best regards,
David Burgess
VP Investment Management
MWM LLLP
