“There is nothing more deceptive than an obvious fact.” – Conan Doyle
Jobs data, put simply, was ugly. Tuning in to watch the news before the announcement, several analysts and economists were asked for their predictions. Even the most bearish prognosticator got it wrong. As I’ve been saying in The Lead-Lag Report chat room, bonds were clearly anticipating a poor number given the collapse in yields we’ve been seeing in the last several weeks. This, combined with small-caps (IWM) which have been incredibly poor relative performers as of late, suggests that once again market volatility is about far more than tariffs and trade wars.
The bullish argument here is that the Fed will be forced to lower rates, and that will push stocks higher. Maybe – but I continue to think they would send the absolute wrong message to the market doing this with unemployment still at 3.6%. I simply don’t think that stocks will respond to monetary policy the same way they have in the past. There are certain things fundamentally that will catch up with equity investors after years of being ignored. One example is corporate profit growth, which is largely non-existent. Yes - trade wars likely impact profits, but profits have been stagnating before any of this took place.
Manufacturing activity is confirming that things domestically are a lot weaker than people realize, justifying bond market (TLT) movement. Industrials (XLI) relative to the S&P 500 (SPY) peaked at the start of 2018, and few seem to be paying attention to the remarkable multi-year weakness in autos. Car companies have been weak for some time, before Mexico (EWW) tariff threats. All of this confirms domestic weakness is picking up steam, and that bonds are perhaps acting more appropriately to current conditions than most think.
Now maybe all of this is bullish. After all, there is a bottom somewhere. I don’t disagree that mean reversion could kick in and provide room for stocks to avoid a Spring Crash scenario and push to new highs (or at least a catch-up trade among reflationary equities and commodities). Risk triggers still suggest conditions aren’t all that favorable as I’ll be addressing in the next Lead-Lag Report, but subjectively I still think this is a high risk environment that isn’t being as appreciated as much as it should be because the S&P 500 (SPY) is the only thing that gets attention. All I know is that markets have a funny way of surprising people, and the worst may yet still be to come.
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