May 15, 2015

What, Me Worry?

These days we are presented with a classic snapshot of the chaos that nurtures volatility, that unruly market behavior that undermines logic and defies any rational explanation for a trend. The culprits are numerous and while the efforts may be in earnest it cannot be ignored that those who speak for us are often so confident as to drive me to pine for some good old fashioned doubt. 

Consider the FED, and their newfound passion for passion once again perfectly orchestrated traditional and social media only to confuse the markets by showering investors with ambiguous language suggesting stock valuations being too high or the possibility (kinda, sorta) that rates might rise sooner rather than later. Certainly this is important, as the rise in interest rates is generally accompanied by a rise in the dollar and neither is very good for the stock market, which has not had a reasonable correction in a few years. But as caution prevails so too will stocks follow the path of least resistance, which for now is up. Take one for the doubters.

As I’ve often noted in my commentaries the interest rate markets normally don’t need the FED to send rates higher, which is exactly what has been happening for the past three weeks. The first pitch was made by a group of well, albeit, self-advertised activist investors lamenting the unsustainable conditions of European interest rates, especially German bonds. This precipitated a sympathetic rise in US bond rates that was so strong as to effect a slowdown in mortgage applications as well as throwing caution to the wind in the minds of some bullish stock investors. And stocks which in a valiant attempt to shrug off the recent rise in interest rates with some unruly volatility early in the week, managed to find their footing as commodities and a weaker dollar gave hope to the armchair economists looking for clues to future of the economy. Doubters to the rescue.

For now I believe much hinges on employment, my benchmark for the strength of the economy. As far as the recent unemployment data suggest I found the number to be a mixed blessing. While the headlines focused on the good payroll growth, the more relevant details were the downward revision from last month’s poor showing that includes the loss of nearly 50,000 workers related to the recent declines in the oil and gas industry. And the participation rate continues to decline to levels not seen in decades. Coupled with recent declines in consumer confidence and spending and it is possible to be confident that a margin of healthy doubt about the markets is in order.

Sooner or later the markets are going to reflect a real economy in need of higher rates. At that time the markets will correct as they’ve not done so in a very long time. Therefore the question is not if, but when. In the meantime there is still value to be found in the broad markets, and room for a little bit of doubt, just for good measure.