Market Strategy 6/06/2022
Rainy Day? Ain’t No Use In Getting Uptight
Last week’s downside market action reminded us that a detour does not a journey end
- With Q1 earnings season moving into the rearview mirror, economic data will capture investors’ attentions this week, particularly with the CPI figures and the University of Michigan’s preliminary consumer sentiment figures for June scheduled for release on Friday.
- Good economic news in the May jobs numbers released last Friday was ill-taken by the equity market, which worried it could invite a more aggressive stance by the Fed going forward.
- In our view, last week’s economic data showed the US economy remaining resilient. The nonfarm payrolls gain exceeded estimates, showing US firms eager to hire workers. At the same time, the growth in hourly earnings slowed a bit in May, easing fears of a wage-price spiral.
At first glance the jobs numbers released on Friday looked positive for market performance that day as the better than expected number seemed to provide the Federal Reserve greater leeway in adjusting its monetary policy. The number indicated job growth was strong enough to suggest the economy was moving on the right path to sustain a higher interest rate regime.
Market futures, however, soured quickly on the news suggesting traders didn’t see the positives in the numbers and stocks broadly moved lower on the day taking back some very nice gains a solid rally across US stocks had on the prior day.
The participation rate in the labor market (the proportion of workers ready and able to work) didn’t impress market participants and the positive surprise to the jobs added in May was taken to mean the Federal Reserve Board might take the economic strength indicated as supportive and inviting of a more aggressive stance by monetary policy makers.
Such negative projection in periods of transition from crisis to post-crisis to recovery is certainly not uncommon in our 39 years in the marketplace. In hindsight the day-to-day performance often gets smoothed out over time as new price trends emerge.
In essence folks often don’t like change even if it’s for the better. Often those most negative on things working out are those using leverage and aggressive positioning that could be hurt by positive change. Nothing too surprising. Remember there’s always at least two sides to a trade.
In our view, last week and much of the year as it has unfolded thus far should remind investors that economies and markets are in transition in a challenging period (that includes: 40-year high inflation; global and domestic supply chain dysfunction; Russia’s incursion into Ukraine causing high levels of geopolitical risk compounding already existent supply chain dysfunction; an inflation blow-back effect even from sanctions; surging oil prices; and the effects of “zero-COVID” tolerance shutdowns in China).
The key point we’d take from last week’s trading sessions in US equities is that markets are naturally taking it all in and are navigating monetary policy and economic transition. During periods like these every data point, every utterance of Fedspeak (when Fed officials speak in public or in the media) is subject to opinion and often negative projection about risk versus the likely reality of a positive outcome in a period prone to “two steps forward one step back.”
Times like these we have found over the years require patience, prudent diversification and a sense of context. In spite of their troublesome nature in hindsight such downdrafts create opportunity for traders and investors. Hindsight is the best for knowing when the bottom is actually put in. Until then everything is relative.
Frequently over the course of this year we recall 2009, the pivotal year into recovery from the financial crisis. The S&P 500 fell some 25% from early January through March 9 of that year (illustrated on page 5 ahead). What followed? The S&P 500 rallied some 64% from the low on March 9 through the end of that year. The upside wasn’t in a straight line that year and came with plenty of day to day uncertainty and negative projection from many corners of the market. Notwithstanding calls from some for “death crosses” and “Hindenburg effects” to challenge the S&P 500’s path of recovery the broad market closed up 23% in 2009 for the full year, before adding the effects of the dividends paid that year.
High levels of negativity among professional and individual investors counterintuitively often from a historical perspective have suggested not so much that “the end of the world was near” but that the next phase of positive performance for the economy and markets was somewhere around the corner if not as close as many of us would like.
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