Has the Stock Market Established a Bottom?

The Jan. 4 monster rally in risk assets, which saw major U.S. stock indexes surge by 3 percent to 4 percent and the “risk-free” yield on 10-year US Treasuries rise by 11 basis points, was a stark illustration of the power of a favorable alignment of the trifecta of economic fundamentals, central bank liquidity and technical factors. Whether markets have reached the bottom of what has been a brutal few months for investors is, however, a much more complicated and uncertain question.

The strong employment data released early Jan. 4 ensured a solidly higher open for markets. Not only did the economy create 312,000 new jobs in December, or almost twice the rate of consensus expectations, but wage growth also picked up (to 3.2 percent annually), and revisions bolstered the October and November jobs tallies. Concerns that the latest report would push the Federal Reserve into a more hawkish policy stance were offset by another encouraging component in the monthly data: a rise in the participation rate (from 62.9 percent to 63.1 percent), which indicated there is a further element of slack in the labor market