The day's huge employment situation report offered disconcerting information to the discerning, as a surface level improvement in the unemployment rate proved quite suspect after review of the detail (see my report: Jobs Report Favors Change). Equity futures immediately started to reconsider green territory established before the release of the data, but that didn't last long. The market then headed decidedly higher, brushing off important economic deterioration in favor of something else.
What is holding equities above water is hope. Specifically, it's hope that the Federal Open Market Committee (FOMC) will issue a new phase of quantitative easing or some other creative form of policy (ala the ECB) at its announcement next week. Certainly, the bad news today for the economy increases the odds of Federal Reserve action, and the market is betting on that.
The SPDR S&P 500 ETF (SPY) was up fractionally through midday Friday, after marking a 2% gain Thursday on the ECB announcement. Shares of cyclical industrials and financials are leading the way higher, with the Industrial Select Sector SPDR (XLI) and the Financial Select Sector SPDR (XLF) up 0.7% and 1.0%, respectively. Individual leaders included Caterpillar (CAT) and Bank of America (BAC), up 3.5% and 4.2%, respectively. But is the basis for rise capable of offering more than just hope? If not, it should not be long before the gains just detailed reverse.
Mortgage rates are at record lows, and yet lenders like BofA and J.P. Morgan Chase (JPM) aren't issuing loans at a blockbuster rate at all. In fact, Bank of America has been reining in its loan portfolio, due to the risk it carries. So, lower rates are not likely to help much more, as the key problem is qualifying potential home buyers for a mortgage after the damage done to their credit records through the financial crisis. On top of that, the burden of the current economic environment continues to weigh on all of us, especially the underemployed. And just try getting those who would like to move to take a loss on the real estate they already own. And while the new home market seems to be benefiting today, if you look at the production of large public builders like PulteGroup (PHM) and Toll Brothers (TOL), their gains have come within a slowly recovering and still vulnerable overall real estate market. Truth be told, gains have been significantly driven by the construction of multi-family projects geared for new rentals.
The real fix can only come with time, and by fiscal change, if not genius to get us out of this mess. My perspective of Washington is that genius is in rare supply, while egos and division are running rampid. Besides, even if Washington had all the answers, our economy would remain burdened by the deterioration of Europe and its impact globally.
Earlier this week, ahead of the announcement that fired up stocks on Thursday, I suggested investors take advantage of the coming rally into the ECB and FOMC announcements. While I stand committed to that today, as stocks continue to make me look smart, I do not believe the rally will last long after the Fed's announcement is published. That's because its powder will have been used, or not, and the onslaught of economic data deterioration will continue thereafter. Neither will the bombardment of political criticism stop against the economy and its keepers. Meanwhile, the ECB's plan still faces a German Constitutional Court threat. Questions will continue to mount regarding just how much impact the central banks can have, and eventually, the tone of conversation might turn to the potential new damage bank actions could have. So, while you have the Fed and ECB to thank for your retained gains today, I think they'll find themselves thankless soon enough.