In what can only be described as a collective ‘whatever’ from market participants, the equity markets have largely shrugged off the Bureau of Labor Statistics’ estimate of 39,000 net jobs being created during the month of November and are currently trading in an unchanged manner. This despite the general expectation of 150,000 to 175,000 jobs that most anticipated prior to the release. Given the level of focus that normally surrounds this data point, it’s near shocking to see the markets behave so indifferently with such a sizable disappointment, especially when employment levels remain the wildcard in this economic recovery. As an explanation for this indifference, many have pointed to the menagerie of other reports that have suggested employment growth has been occurring, this week’s ADP report in particular. Regardless of whether or not the BLS data is, in fact, an outlier among employment reports, the fact that it’s being dismissed out of hand is emblematic of the wave of bullishness that has swept over the marketplace this week. As such, economic data, for now, appears irrelevant to the equity markets’ for at least the remainder of the year.
Interestingly, the early trade in gold bullion suggests that gold traders are drawing a somewhat different conclusion from the jobs numbers than their equity counterparts. Up nearly 1% to $1,402/oz. so far today, it seems as though the gold market is saying that weaker than expected job growth lays the foundation for continued quantitative easing by the Federal Reserve, which, therefore, raises the prospects of U.S. Dollar devaluation. While this thesis could prove correct (I have my doubts), the larger take away from this price action is the apparent divergence of opinion between the gold and equity markets. Having moved in near lock step for most of the past two months, today’s breakdown in the markets’ correlation is a significant development that bears watching closely. To an extent, the weakness in the U.S. Dollar Index today is contributing to gold’s move, but having been currency-movement-agnostic for the past few weeks, reading too much into gold’s rally today is probably unwise. Whether or not the yellow metal can break through its November highs is probably the best indicator to watch to gain a sense of the longer-term trend we can expect. For my part, this would be a sign to liquidate my short position.
With such large gains seen over the two prior sessions, the equity markets’ ability to sustain the majority of its weekly gains is the primary intraday trend worth keeping an eye on. As I Tweeted yesterday, the S&P 500 is up about 3.5% for the month, which is double the month’s average return of 1.65% and meaningfully higher than December’s average gain of 2.92%. This suggests, to me, that there isn’t a lot of room left for the market to run, especially with large resistance sitting around 1,235. But with so much bullishness taking hold, anything can happen. Early weakness in the Treasury market is something worth noting, but given its bearish technical characteristics this is not too surprising. But as 10-year yields begin to approach the 3.20% level, look for buyers to come in with force.
With so many conflicting indications swirling about, I’m really struggling to comprehend what the markets are telling me at this point. The year-end bullish seasonality adds all the more confusion to the mix as I try and look through the short term noise to glean the intermediate trends. For now, my thoughts are as follows: 1) The U.S. economy is likely through the worst of the financial crisis and resulting recession. 2) Though the worst has passed, U.S. job growth remains stagnant and well below trend, which will continue to act as a drag on GDP growth. 3) The Federal Reserve’s quantitative easing actions are flooding the system with additional currency that is finding its way into assets like equity shares and commodities. Whether or not this action is simply creating another bubble or providing the wealth effects needed to restimulate economic growth remains to be seen. 4) Europe remains mired in a sea of debt that cannot be overcome simply through austerity programs. As such, the recurrence of crises across the Continent is likely to be seen for at least another year. 5) China and most of developing Asia remain the engine of growth in the world as confirmed by both corporations and German exports. Given the internal issues of inflation, large quantities of underperforming loans, and social unrest, how long can this region remain a fixture of growth? And if this grow slows, what are the spillover effects on Western economies? My read is that this is the powder keg that could touch off another crisis.
Until later…..
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