The end of May saw a rush of volatility, as if the markets were suffering from seasonal allergies.
The S&P 500 index rose or fell by more than 1% in three of the four trading days in May’s final week, following the Memorial Day holiday, while the Dow Jones Industrial Average gained or lost at least 200 points every session.
Then, having gotten the bugs out of their system with one big sneeze, markets quietly started marching higher.
From May 29th through early Friday afternoon, the Dow gained almost 900 points, while the S&P 500 added nearly 100. The Nasdaq Composite index and the Russell 2000 small cap bellwether both hit all-time highs. And the CBOE Volatility index—the VIX—held fairly steady, about 13 or so. That’s much higher than its all-time low of 9.14 last November, but well below its average around 20.
So, it looks like markets are settling down a bit. Or are they?
Italy is known for its magnificent scenery, extraordinary art, great food and terrific wine. It’s also known for its stagnant economy and dysfunctional politics.
Government debt is 132% of GDP (vs. around 100% and growing in the U.S.) and the European Commission was actually thrilled to see GDP grow at 1% this year, which they called an “acceleration.” (From what, you might ask.)
The country has had more than 65 governments in the 73 years since World War II ended. Attempts to form the latest one started a mini-crisis early this week.
Sergio Matarella, the country’s president—a largely ceremonial position—refused to accept a finance minister picked by the prime minister in waiting, Giuseppe Conte, who had been chosen after months of negotiations by a coalition of the far-right, anti-immigrant League and the populist 5-Star party. The two anti-Establishment parties pulled off a stunning upset when they won 50% of the vote in March’s parliamentary elections.
Matarella’s move threw markets into turmoil Monday, even though it delayed the formation of a profoundly anti-European Union government that actually might begin to move Italy out of the European Union and euro (call it “Itexit”).
On Tuesday, the Dow Jones Industrial Average plunged nearly 400 points and the Standard & Poor’s 500 index lost more than 1% of its value.
But then something strange happened.
It’s Memorial Day Weekend, when many Americans will hit the beach—at least those who got away early will, before the storms hit.
The markets, too, are going through a “just when you thought it was safe to go back in the water” moment. And the big storm–or shark– that’s looming is named Donald J. Trump.
Earlier this week, markets rallied when it looked like the U.S. and China had agreed to a partial trade agreement that didn’t include heavy tariffs or specific dollar reductions in the trade deficit.
But just as soon as the media lambasted the president about that, he pivoted to a harder-line stance, telling the Commerce Department to determine whether imports of automobiles and auto parts constituted a threat to “national security.” Yes, you read that right.
On Thursday, he pulled out of the proposed summit with North Korea, telling its president. Kim Jong un, that they had had a “wonderful dialog” and he was “very much looking forward to being there with you.” But, unfortunately, Trump was just not into him.
What happens when things are as good as they get?
That’s what many people must have been wondering when the April jobs report was released early Friday morning. The U.S. economy added 164,000 jobs, the unemployment rate fell below 4% for the first time since December 2000, and average hourly earnings rose by only 2.6% on an annual basis.
There was far too much hand wringing about the employment figures, which were below economists’ projections. Yes, it was a little short, but the average job creation for the last three months topped 200,000.
But that missed the entire point: At 3.9% unemployment, the economy is at full employment.
Yes, there are still a lot of people out of the labor force, but retirements, disabilities from drugs or injuries, millions of ex-cons and parolees, and people who just don’t have 21st Century job skills have kept the workforce participation rate low.
With employers across the country practically begging to fill thousands of open positions, that sure sounds like full employment to me.
But even with that, wages rose by far less than economists projected, tamping down fears of inflation. The ten year Treasury note yielded 2.95% at the close—below the magic 3% number—and the Dow Jones Industrial Average rallied 332.36 points Friday.
So, is it too good to be true?
You might compare investing today to juggling: You need to keep several balls or pins in the air and make sure they don’t hit the ground.
That’s the tradeoff between risk and reward, hope and danger, that confronts us now.
As I’ve stressed in these commentaries and my MarketWatch column, the fundamentals for stocks look very good now: a strong economy, subdued inflation, very low interest rates by historical standards, and great earnings, all without outlandish valuations.
But there’s a lot of uncertainty as well, particularly about trade and geopolitical issues involving North Korea (subdued now because of the planned upcoming summit between President Donald Trump and North Korean President Kim Jong-Un); the Middle East, particularly Syria, and longer-term concerns about growing household and government debt burdens.
That has translated into rising share prices because of fundamentals but increased volatility because of all the uncertainty.
Which one will prevail?
It’s pretty hard to figure out what makes the market tick these days.
Is it the economy? On days investors get good news on that front, stocks take off. Last week’s jobs report, for instance, pointed the way to good growth and low inflation—not too hot and not too cold.
Or is it politics? When tweetstorms erupt from the official residence of the White House, people listen and markets move.
When President Trump launched a Twitter attack on Amazon a couple of weeks ago, the stock tanked. When he announced he would slap big tariffs on China, markets sold off. And this week, when he threatened to unleash missiles on Syria in retaliation for President Bashir al-Assad’s latest chemical attack on his own people, oil prices rallied and stocks tumbled.
But then, China’s President Xi Jinping made what were construed as conciliatory remarks on trade (but was really a rehash of previously stated positions) and both Russia and the U.S. backed off talk of military action in Syria. In both cases, stocks rallied.
So, how can you tell what’s really moving markets?