04 Apr IS THE MARKET TRANSITIONING?
Where do I start? The last 30 days could be pivotal. Commenting first about the jobs data, in my view march’s employment report is something all could have been hoping for. Payrolls rose more than expected and the prior month’s data was revised higher. Over the last four months, the size of the US labor force has risen by 1.92 million, the strongest period since early 2000. The labor market has had its best two years of jobs growth since 1998-99 according to the BLS.
Wages also rose and are up 2.3% in the past year, matching February’s annual increase which was also revised higher. While most would scoff at these increases, all must remember wage increases are closely correlated to inflation and these gains are about 1% greater than the Fed’s preferred measure of inflation.
The unemployment rate did rise to 5.0% but this is the result of more workers entering the workforce which permitted the labor participation rate (LPR) to rise to 63.0%, the greatest participation since March 2014. The LPR is now up 0.6% during the past six months, the biggest advance over a similar period since 1992.
I think an accurate conclusion to make is that US job creation has not fallen off the cliff like some had expected as little as 45 days ago and such creation bodes well for continued, albeit moderate growth.
The second topic I would like to discuss is potential market rotation. Since January 2014 I have been discussing the impact of momentum driven trading, the result of HFT and the proliferation of ETFs. 2015 was a disastrous year for anyone who was not involved in momentum growth as compared to value…a differential over about 52%–the largest on record.
Are momentum driven models blowing up, the result of the trade becoming so overcrowded? JP Morgan writes the losses in momentum though mid-March is the largest since 2009 with a 20% decline.
JP Morgan is suggesting that value may beat momentum by 40% this year based upon “mean reversion” and valuation/ownership metrics. According to JP Morgan, the last major rebalance occurred in 2013, the period when momentum began to trounce value.
The third topic is first quarter earnings season. According to FactSet Research, 94 S & P 500 companies have issued negative guidance for the first quarter of 2016 while only 27 have issued positive guidance.
Current totals are the second highest on record, trailing only the fourth quarter of 2013. The tech sector is leading with 25 companies issuing negative first quarter guidance followed by 18 in consumer discretionary and record 17 in the healthcare.
I think this data is significant given a vast majority of momentum trading is focused in the technology and healthcare companies. As noted above momentum is down about 20% for the year, perhaps the result of falling profit expectations.
Rhetorically speaking, maybe the markets are not immune to economic and political analysis as some believe and fundamental analysis does matter.
The fourth topic I would like to discuss is volatility. The S & P 500 has not moved intraday 1% for one month, the longest period in one year. What is this suggesting? A possible decline of the influence of HFTs, perhaps the result of a collapse in the prices of mega capitalized momentum growth issues? Maybe.
Finally is the decline in oil, the result of Saudi Arabia stating it will not support a production freeze without Iran’s participation. As noted many times, equity markets are closely correlated to oil. Oil was down about 3.5% but the averages were essentially unchanged. Is this correlation beginning to end?
Commenting about Friday’s activity and as inferred, equites advanced on the jobs data even with oil declining, the second such occurrence for the week. An expanding manufacturing sector, the first expansion in seven months, boosted economic optimism. The dollar fell as did treasuries.
What happen his week? The economic calendar is comprised of various manufacturing statistics, the ISM non-manufacturing index, trade balance, inventories and Minutes from the mid March FOMC meeting.
Last night the foreign markets were mixed. London was up 0.76%, Paris up 1.12% and Frankfurt up 1.03%. China was down 1.78%, Japan down 0.25%, and Hang Sang down 1.34%.
The Dow should open nominally higher on optimism the central banks will maintain current policies. Oil is unchanged. The 10-year is unchanged.