I can’t remember a single time in recent years when the stock market, the economy, politics, and investors’ behavior were less in sync.
On Friday, the second revised GDP report for the first quarter of 2017 showed a 1.2% annual real increase—double its first estimate of 0.6%, but still pretty feeble. Meanwhile, durable goods orders dropped 0.7% in April, a bad sign for the second quarter but in line with the weak “hard” economic data I wrote about in my MarketWatch column this week.
Yet The Dow Jones Industrial Average, Standard & Poor’s 500 index, and Nasdaq Composite index rose six days in a row through Thursday, and the latter two again hit record highs.
So, how did investors react? They sold $3.3 billion worth of U.S. stocks this week, according to Bank of America Merrill Lynch, after having unloaded $9 billion last week. Maybe they’re selling on the good news, but I doubt it: According to the Investment Company Institute, they’ve been pouring money into underperforming foreign stocks, particularly emerging markets, for years.
And the prospects in Washington for health care reform, tax reform, and infrastructure (key pillars of the Trump rally) are fading.
How do we sort this all out?
Well, that didn’t last long, did it?
Just last week investors didn’t have a care in the world, despite what in retrospect was a gathering storm around President Trump’s firing of FBI Director James Comey.
The CBOE Volatility index (VIX), dubbed Wall Street’s fear index but which I call its complacency index, didn’t move up much from its 24-year low of 9.77 last Monday. “So, if the Comey Affair doesn’t matter to markets—yet—what does?” I wrote.
That “yet” should have been in capital letters, because after the blockbuster report in The New York Times that Comey had a memo saying the president had asked him to end the FBI’s investigation of ties between Russia and the Trump campaign, markets were gripped by a mini-panic.
On Wednesday, the Dow Jones Industrial Average plunged 372 points, the Standard & Poor’s 500 index slid 1.8%, and the VIX spiked 50% in a single day, to close at 15.59. That same evening, Deputy Attorney General Rod Rosenstein named former FBI Director Robert Mueller special counsel for the Russia investigation.
That’s calmed jittery markets (the VIX was trading near 12 Friday), but was it really back to normal again?
The political world is agog over the fallout from President Donald Trump’s firing of FBI Director James Comey. But investors? Not so much.
The event and the constantly changing rationales coming from the White House are making cable news executives smile. Neither conservative Fox News nor progressive MSNBC nor center-left CNN are having problems filling air time—or, as they say in the trade, feeding the beast. And it’s been driving ratings to the sky.
Even print media stalwarts, who now claim to be “digital first,” like The New York Times, Washington Post, and Wall Street Journal are racking up good old-fashioned scoops and boosting subscriptions by the most in years.
But Wall Street is keeping its cool. Over the last three weeks the Dow Jones Industrial Average has been stuck within a 125-point trading range, while the Standard & Poor’s 500 index hasn’t swung more than 25 points either way.
Meanwhile the CBOE Volatility index (VIX), which people call Wall Street’s “fear index” but I think is more accurately its complacency index, has ticked up from a 24-year closing low of 9.77 Monday to 10.72 late Friday. Still, that’s way below where it’s been for most of the year and suggests nervous jitters rather than real fear.
So, if the Comey Affair doesn’t matter to markets—yet– what does?
Spring came late this year in the Northeast as a late March blizzard threw off the normal seasonal rhythms. But now the trees are green, the flowers are blooming, and allergy sufferers—of whom there are several at home—are downright miserable.
The economy, too, has gone through a long winter. But with Friday’s jobs report, well, spring may have sprung.
Employers added 211,000 new jobs in April, well above consensus estimates of 185,000 and more than 2 ½ times March’s revised figures of 79,000 new jobs added. It marks the third out of the first four months this year in which job growth topped 200,000. Average job growth over the past three months was 174,000, pretty much in line with last year.
Even more impressive, the unemployment rate fell to 4.4%, the lowest it’s been in a decade, since before the financial crisis. That was as low as it got in the last economic cycle, so if this isn’t full employment, what is?
I can see at least two possible outcomes here.
Up one day, down the next, then up again, then down. That’s how stocks have been behaving lately.
And don’t blame the usual suspects. The Federal Reserve is on a clear course to gradually—the word Fed Chair Janet Yellen has been using for the last couple of years—raise interest rates, which remain historically low.
The big question hanging over the Fed, of course, is how to shrink its $4.5-trillion balance sheet, which it built through massive bond buying after the financial crisis. But the central bank is likely to be even more cautious with that.
The second big pillar of stock performance—earnings—have been doing just fine. Sheraz Mian of Zacks wrote that as of Wednesday first-quarter earnings are ahead of expectations, as 75% of companies in the Standard & Poor’s 500 index reporting thus far have beaten earnings estimates and 54% have topped sales expectations. Mian expects earnings for S&P 500 companies to be up 8.6% over last year. That’s the best quarterly performance in quite a while.
So, with the Fed moving slowly and earnings rising strongly, stocks should be advancing, right?
But they’re not, so we need to look at the un-usual suspects.
Markets are closed for Good Friday, but it’s not a federal holiday so the U.S. Census Bureau and Bureau of Labor Statistics are busy issuing data. They probably should have taken the day off.
The consumer price index fell by a seasonally adjusted 0.3% in March, the first time it’s dropped in 13 months. Economists polled by Econoday expected it to be steady, so that was a huge, shocking decline. Some people blamed a 6.2% drop in gasoline prices, but the core rate, which excludes food and energy, also fell by an unexpected 0.1%.
And retail sales fell by 0.2% in March, powered largely by the third consecutive monthly decline in auto sales. Also, February retail sales were revised sharply lower to -0.3%, making February and March the worst two-month stretch for retail sales in two years.
What does this mean and how will it affect markets?
That’s it for Republican health care reform plan. For now.
After an emergency meeting in the White House with President Donald Trump, Speaker of the House Paul Ryan pulled the American Health Care Act (AHCA) from a vote on the House floor.
The AHCA was the Republican leadership’s effort to repeal and replace the Affordable Care Act (ACA), or Obamacare, which was signed into law seven years ago Thursday. But it faced a mutiny by both moderate and conservative Republicans in the House of Representatives, and so the Speaker folded his cards rather than face certain defeat.
It was a major setback for the president in his first legislative effort, and for some pundits it called into question his ability to push through the ambitious legislative agenda that triggered the Trump rally on Election Day.
But markets, which sold off a little this week, reacted well. The Dow Jones Industrial Average, which was off more than 100 points earlier, rebounded a bit and closed down around 60 points. The Standard & Poor’s 500 Index closed down less than 1/10 of one percent. The Nasdaq Composite index actually closed up a bit.
So, some investors are looking on the bright side.