What Drives the Stock Market
Good to be back in the saddle after of a week of traveling in Silicon Valley, Napa and San Francisco. And I thought New York real estate prices were crazy.
Whenever I am away, I like to ease back into the groove by reviewing some broad market and economic metrics. It isn't that a lot changes in the day-to-day or even week-to-week numbers -- short-term measures are terribly noisy -- but rather it’s a good exercise to return to form.
Let’s jump right in:
Breadth: I have discussed the importance of the advance-decline line many times before (see this, this and this). The simple fact is breadth remains positive. Lowry Research Corp., a technical market-research service, observed that several of its advance-decline indicators “are all confirming the April market highs.”
From my perspective, I find it extremely helpful to be able to put this into context for those who have a low tolerance for volatility. It also is nice to know where we might be from a cyclical perspective. If you are a long-term asset allocator, willing to ride the ups and downs of volatility, this probably doesn't mean very much to you. But if you are a trader, this may well mean that there more gains to be had.
Employment: Regular readers know of my disdain for the obsession with this number. It is very noisy and subject to significant revisions. The broad trend is what matters much more than any single month’s data.
Was the weak showing for March a one-off, or was it the beginning of a new, deteriorating trend? We won’t be certain for a while, but Friday’s numbers didn't suggest a weakening employment pattern. Unemployment fell 0.1 percent to 5.4 percent and wages rose slightly (0.1 percent). The data also show that long-term unemployment -- those people who are unemployed for more than 27 weeks -- continues to head lower. It is now 29 percent of total unemployment, down from 45.5 percent in April 2010. This, along with little increase in wages, has been the most stubborn negative about nonfarm payrolls.
Gross Domestic Product: Your view of growth is highly dependent on your frame of reference. If you use the post-World War II recession recoveries as your data set, then this recovery is stubbornly slow, with mediocre job creation and weak wage gains. However, compared with other post-financial-crisis recoveries, this one is a little better than average.
Retail Sales: Modest wage growth has translated into modest retail sales gains. Low gasoline prices help, but they only go so far.
It is noteworthy that sales remain highly dependent upon credit availability. Where credit is easy, sales are strong; where it's tight -- such as in mortgages -- they are much softer. Credit has been readily available for automobile purchases. Not surprisingly, car sales have been robust. Cheaper gas helps demand for more-profitable SUVs and pickup trucks, which are now 54 percent of all auto sales. It doesn’t hurt that gasoline still costs about $1 a gallon less than it did a year ago.
Cars are selling at a seasonally adjusted annual rate of 16.5 million compared with about 9 million in early 2009 during the financial crisis. Give credit to, well, easier credit for auto buyers.
Psychology: It’s a bubble, it's going to end badly, the NFP is a fraud, it's all driven by the Federal Reserve's irresponsible easy money policy, blah blah blah. My only comment is that I can't find a single bubble that ended with so much blather about a bubble about to end. If the crowd is right about a bubble, it might be the very first time the herd identified a bubble in real time.
Valuations: Speaking of which…Fed Chairwoman Janet Yellen surprised markets with a 1996-like “irrational exuberance” comment. Of all the many things I don’t care about, the Fed chief's perspective on equity valuation tops the list. I don’t believe the Fed understands equity pricing or the wealth effect, and it hasn't proven especially prescient when it comes to forecasting (though Yellen seems to be better at it than most Federal Open Market Committee members).
Let me point out that the infamous irrational exuberance speech by former Fed chief Alan Greenspan was 3 1/2 years ahead of the bursting of the dot-com bubble. If you or your clients were content to not participate in the 1996-2000 bull market, then you probably can afford to sit out whatever move 2015–2019 has in store for us.
Bond Yields: Yellen’s comments are likely more significant for bonds than they are for equities. The Fed's zero-interest rate policy is going to end eventually, likely sooner than later. Whether that means it is this September or in January is almost irrelevant. Unless the data changes significantly, we are now in the seventh or eighth inning of low yields. Please close your trays and put your seat in the full upright position for landing.
The reason for looking at these items? They all flow through to investor sentiment. Psychology drives retail and capital expenditure decisions; changes affect corporate revenue and profits; and these elements ultimately drive stock prices.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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Barry L Ritholtz at email@example.com
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