The Daily Prophet: It's Hard to Keep a Good Stock Market Down

Connecting the dots in global markets.

U.S. shares led global stocks to another record high Monday, which proves yet again that the ultimate pain trade is betting against equities. The list of reasons not to like stocks is long, ranging from turmoil in Washington to the U.S. being hit by major back-to-back hurricanes to concerns about a nuclear strike by North Korea. But this bull market has one big thing in its corner: a resilient economy.

No matter what gets thrown at this rally, evidence of a Goldilocks-like environment replete with low inflation and low borrowing costs abounds. In a report Monday titled "The Teflon Market," Leuthold Weeden Capital Management Chief Investment Strategist Jim Paulsen writes that this year's decline of the dollar and longer-term borrowing costs is a "powerful one-two punch" that should keep the economy humming. As it is, a monthly survey of 73 economists conducted by Bloomberg News from Sept. 1 to Sept. 7 found that the median third-quarter growth estimate rose to 2.6 percent from 2.5 percent in the prior poll.

Paulson cited the ratio of an index of raw materials to a four-week average of initial jobless claims -- an economic gauge known as the Boom-Bust Barometer at Yardeni Research -- as showing that stocks have a solid foundation. What about Hurricanes Harvey and Irma, which struck economically important areas of Houston and south Florida within a matter of weeks? The consensus is that any slowdown will be brief and made up in the following quarters. "Although a temporary pause or pullback will certainly come at some point," Paulsen wrote, "it’s difficult to rattle a stock market if it enjoys a strong fundamental underpinning -- even if worries are persistent and copious." Paulsen made the same point in mid-February, and the S&P 500 is up 6.44 percent since then.

If low borrowing costs are a boon to equities, then stock investors should be breaking out the champagne. That's because the amount of negative-yielding debt globally has risen back above $10 trillion for the first time since October, according to a Bloomberg Barclays fixed-income index. There's no doubt the increase reflects global jitters as investors seek a haven, it's also a sign that central banks may not be able to withdraw from their extraordinary stimulus measures as soon as they have suggested given that inflation has slowed markedly. “We’re in a disinflationary environment that will be with us for several years," Dimitri Delis, senior econometric strategist at Piper Jaffray, told Bloomberg News' Brian Chappatta. As it is, central bank balance sheets continue to expand by about $300 billion a month, which is money that ultimately finds its way into riskier assets such as stocks.

The normally sleepy market for securities designed to protect insurers from payouts for natural disasters by passing on the risk to investors is suddenly hopping. On Friday, the benchmark Swiss Re Cat Bond Price Return Index fell 16 percent, the most on record, as Hurricane Irma approached Florida as a category 5 storm and forecasters estimated damages of as much as $200 billion. The damage wasn't as bad as feared, and the selloff in so-called catastrophe bonds looks overdone. In fact, it could help strengthen the market in the long run by boosting yields for catastrophe bonds, according to Bloomberg News. “You don’t need that much of a price increase for the capital that’s currently on hold to be flooding into the ILS market," Rafal Walkiewicz, head of the securities division at Willis Towers Watson, said in reference to insurance-linked securities. The $90 billion market, which is mostly exposed to Florida, was stable for many years as the most costly natural disasters occurred in other regions, such as Louisiana or Japan. The scarcity of losses meant many investors were willing to accept ever-lower yields, a trend that discouraged some from jumping in.

Irma also roiled the markets for orange juice and cotton. Prices rose steeply last week on concern crops in Florida, the nation’s biggest citrus grower, would be destroyed while cotton areas in Georgia and South Carolina faced strong winds and flooding. With the damage being assessed, orange juice dropped as much as 5.8 percent on ICE Futures U.S. on Monday after reaching a four-month high last week. Cotton tumbled by the exchange limit of 3 cents. Irma may have damaged 10 percent to 20 percent of Florida’s orange crop, according to Bloomberg News' Marvin G. Perez. The storm’s swerve toward the state’s west coast was enough to save the crop from “potentially catastrophic” damage, David Streit, a meteorologist at Commodity Weather Group in Bethesda, Maryland, said in an email. About 5 percent of the state’s sugar-cane crop, was probably hurt, he said. Cotton losses were probably reduced by Irma’s shift and weakening pattern before the storm headed toward Georgia and other southeastern areas. The total yield and quality loss “will likely be modest, at worst,” for cotton, said Louis Rose, director of research and analytics at Rose Commodity Group.

America's greenback enjoyed its biggest one-day gain in more than a month, as measured by the Bloomberg Dollar Spot Index. The thinking is, since Irma didn't do as much damage as feared, there's less of a chance that the Federal Reserve will refrain from raising interest rates one more time before year-end. Or maybe zombies will invade the market and keep the dollar depressed. Seriously. That’s how George Saravelos, global co-head of FX research at Deutsche Bank, depicts the current status of trading, which he says is in a state of “zombification,” according to Bloomberg News' Lananh Nguyen. Like the walking dead seen on television and in the movies, traders are ignoring what’s going on around them, shaking off signals that the Fed will boost borrowing costs and declining to price in any economic policy changes amid political uncertainty in the U.S. “The dollar is in trouble,” Saravelos wrote in a Sept. 8 note. “The market continues to refuse to price additional rate hikes from the Fed, a phenomenon we have termed zombification.”

The Labor Department's monthly report on U.S. job openings has gotten increased attention lately, especially after the data for June showed an increase to a record 6,163,000. That's a sign of strong demand for workers. Markets on Tuesday will get a look at what happened in July. The economists at Bloomberg Intelligence say the data will likely indicate a pickup in hiring for two reasons: A surge in job openings in June and a solid payrolls report in July. They note that the quit rate has failed to establish an upward trend of late, even amid evidence of labor shortages. That's probably because consumer surveys show record satisfaction with employment and personal finances, helping explain the lack of people trying to find a better job as they are satisfied with the work they currently have. 

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