Market Commentary from Guy Baker
by Alexander Beard, on Apr 23, 2015 11:08:36 AM
There are three things going on in the markets right now. First, most of us know that long term performance smooths out short term volatility. By definition, weekly, monthly, or quarterly data will always be more volatile than the long term trend. Go back to the 1980s or 1990s, when real GDP growth was 4%, a “slow” quarter was 2%. But today, our Plow Horse economy has been expanding at about 2.5% annually instead of 4%. This means a “slow” quarter can show zero growth, or even less. This is not abnormal volatility for a slow go economy and could easily be mistaken for real economic trouble. But is it, really?
Second, too many analysts and investors believe the current recovery and bull market are “sugar highs.” This is a mistake. They believe the government’s easy money and spending policies are what lifted stock prices. They believe all growth is artificial and everyone knows a sugar high, by definition, is temporary. All markets are subject to regression to the mean. So when the winter weather negatively impacts the economy, like it has the last two years, the rebound will likely look bigger than the trend.
Third, investors are still suffering from what might be termed, Post-Traumatic Stress Disorder as a result of the Panic ‘08. I wonder how many investors the Panic of 1907? Not many, I am guessing. But the Panic of ‘08 is still upper most on the minds of many and they are like abused spouses, every time something that happens which reminds them markets are random. It makes the world seems less stable. Every piece of bad news is a precursor of another “black swan” event…even though “black swans” are very rare, by definition.
All this produces a feeling of “Dread.” This is the perfect word for how many investors view the markets, the political environment and the economy. Some experience it daily, ever since the bottom in March 2009. Some experience it every time they see the stock market fall. Remember, markets go UP and they go DOWN.
If the economic data is weak, dread can reinforce an emotional response. If there is a change in fiscal or monetary policy, or the market becomes volatile, dread can gain a foothold and cause dysfunctional reactions. The truth is, dread has encompassed the markets a couple of times a year every year for the last six years.
So, here we go again, dread is consuming the media and the investor exuberance. But this time the bar is substantially lower than the past. But it is causing dread. We saw payroll employment increase by 126,000 in March and some analysts predicted reduced real GDP estimates for first quarter to less than 1%. Dread became double dread in some quarters!
It seems the Fed is positioning the economy for a rate hike later this year. Coupled this with a series of temporary or at least one-time events affecting economic data – weather, the drop in oil prices and union slowdown at West Coast ports, you have dread.
It was reported this February was the coldest since 1979. The cold and the sustained decline in oil prices has undermined investment growth in drilling activity. The work slowdown at West Coast ports affected trade data, production schedules, and retail activity. The Fed knows these problems are temporary. So do most analysts. Yet, because these factors have brought growth close to zero, and because the economy is already growing slowly, it builds fear and dread.
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