Nattering Nabobs of the News

On March 18th, 2013, posted in: Economic News, Newsletter by

As you know, We manage markets, not stocks. So what are the trends in the market that are causing the US markets to hit multi-year highs as the economy seemingly shrugs off any negative news. Remember, Markets go up and Markets go down. Here are three possible factors driving this market higher.

#1 – US Jobs Numbers

Regardless of how the Department of Labor manipulates job numbers, it looks like the job market is rebounding. According to the statistics, around 200,000 jobs were added in November, December,  and January. The same was reported for February. This is the strongest job data in over five years. Unemployment claims have declined as well and are at a five-year low.

It was only back in September 2012, when the U.S. economy was adding 100,000 jobs a month. The nattering nabobs of news expressed growing concern about the pending “Fiscal Cliff”. The prognosis was for a major economic slowdown. When this did NOT materialize, the sequester became the focus of bad news. As a result, the Fed stepped up its bond purchases. The poor fiscal predictions brought monetary authorities into the fray once again.

The growing money supply, due to the Fed’s quantitative easing program (QE???) (essentially printing money) has triggered the improving monthly jobs numbers. Economic activity is a function of the velocity of money. With Fed pouring more funny money into the economy, the expectation would be increased economic activity, but at what price?

With sequestration spending cuts now activated, expect to see 1.3% to 1.9% GDP growth for the U.S. economy. However, if the these job numbers continue, it is possible to see up to 3.0% GDP growth for 2013.

Is it possible the stock market is anticipating this enhanced GDP outlook for 2013? Unless we see a faltering job market. It is entirely probable this market surge will be full-steam ahead for a while. Just remember Markets go up and Markets go down.

The major caveat in all this is whether the Fed will discontinue the quantitative easing earlier than expected. Watch the FOMC minutes in the coming months to see whether inflation becomes their primary focus.

#2. The Death of Hugo Chavez and Oil Prices

West Texas Intermediate Crude (WTI Crude Oil) prices fell from $98 to a close of $90 a barrel. This is about a 10% drop in oil prices since the passing of Hugo Chavez. Is there a connection?

OPEC includes Venezuela as a part of the consortium. With the passing of Chavez, unless the new President takes the same strident attitude towards the US, it is likely OPEC will reduce tensions. Chavez nationalized the oil companies and sought control of oil production with an iron fist. His death is viewed as a positive sign for the region by many. Venezuela may now embrace a free market philosophy which would impact their membership in OPEC.

At the same time, North America continues to develop energy independence. New oil reserves and fresh techniques are being developed. These techniques can be applied to Venezuela, which owns the world’s largest oil reserves when heavy oil sands are included in the calculation.

Most economists believe the prices will continue to range between $90 and $100. But now it is probable the price will stay at the bottom of the range. Geopolitical  risks increase the volatility of oil supplies. This reduction in risk will drive the price range lower. Increasing stability in the energy market can only benefit the U.S. economy.

This will cause a ripple effect, making the global economy stronger and increasing demand for oil and stabilizing the price. With the potential for new Venezuelan supply, and lower political risk, oil prices are likely to remain stable.

 

#3. Mario Draghi and Europe Relief

The head of the European Central Bank (the ECB), Mario Draghi, recently announced the short-term policy fixed rate will be 0.75%.

Mario Draghi told the press, “You know the rules. The ball is in the government’s hands”. The ECB has made it clear it will take whatever steps necessary to stabilize the European economic situation. A total collapse of Europe’s financial system is less of a concern now that Mario Draghi has shown support for the rising cross-border flows of capital in Europe. This sign of stabilization has decreased policymakers rhetoric associated about an economic “Domino Effect” caused by peripheral EU countries. As the risk of a financial systemic shock in Europe declines, U.S. stock markets gain confidence. EU Policymakers and the ECB will need to provide more support, but they have shown the will to do so. If they do, expect the S&P 500 to go higher.

What Does this Mean for Investors?

Nothing! It only shows how markets ebb and flow with the gyrations of micro economic news. With an increasingly rosy economic scenario, the markets will continue to grow until such time expectations get too high, then the inevitable will happen, the markets will sell off. This cycle of up and down has been consistent for nearly 100 years. Why would it change now?

The sub market movements are independent of one another. Historically, the stock market has been up about 70% of the time. But it is unpredictable when. So don’t become overly optimistic. It would not be surprising to see a 10% correction in this market, maybe more. But we know once that correction is finished, another run of growth will likely occur.

Watch to see what happens in Europe. If there is another round of economic support from the government, it would lead to GDP growth there. That one catalyst is likely to ripple to America and drive the U.S. markets even higher.

 

This information is compiled by Guy Baker from an assortment of news feeds including First Trust, Yahoo Finance, Bloomburg and others. This information is intended to be informational only. This newsletter contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. All investing involves risk, including the potential for loss of principal. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy.

 

 

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