Where’s the action? Traders on the NYSE floor—and those on sell-side desks around the city—are disappointed at the market’s reaction.
The biggest jobs report surprise in years, by their reckoning, should have resulted in titanic volume—and a big pop in volatility.
Not happening. Volumes are borderline heavy, but not overwhelmingly so. The CBOE Volatility Index (INDEX: .VIX)—the simplest measure of market volatility, is down midday, below 15.
It’s not all quiet. There is considerable churn in Utilities (Dow Jones Global Indexes: .DJU) and other interest rate sensitive sectors like Emerging Markets (NYSE Arca: EEM) and REITs (NYSE Arca: VNQ).
And banks are all up 2%-4% on heavier volume.
Still, given that many were still in the “Fed will not hike this year” camp, there is some surprise there is not more money moving around.
Traders I’ve spoken with explain this by offering two explanations:
1) long-term investors don’t act like macro hedge fund guys and shift their portfolio on a dime. Investment committees—the ones who run the pension funds and the mutual funds–do not make snap decisions on asset re-allocation in the course of a morning. Many will be meeting over the following days–and weeks–to decide if they need to make changes.
But even then, a surprising number are arguing that many will simply decide on a stay-the-course-with-equities approach:
2) The Fed is trying to project a sense of optimism about the economy from the Fed, and what’s wrong with optimism about the economy?
The Fed is not changing much; global rates are going to remain low for a long time, particularly in Japan and Europe.
In the context of still-low rates today and in the near future, this is still an investable climate because a modest economic expansion is ongoing. Stock multiples-—lightly on the high side right now—should not be threatened by the Fed hiking rates. Capital flows are still moving into the U.S.
Oh sure, there could be a period of stress and turbulence when the hike occurs, but this has been so well telegraphed it’s hard to envisage it would last very long.
Mostly, though, it’s good to shift the focus away from liquidity and towards earnings and growth.
And that’s the key point: growth continues, and there is no sign of recession. That is the ultimate killer.
Labor force growth, with GDP growth of 2% is good enough to keep the jobless rate moving down.
Most importantly, the key missing ingredient—wage growth—may be starting to move as well. Average hourly earnings up 0.4% month-over-month, 2.5% year-over-year. Don Strazheim at ISI noted this morning that once average hourly earnings start to accelerate, they typically go from 2% to 4% in roughly three years.
These numbers should at least give the FOMC some hope that their 2% inflation growth target may happen sooner rather than some time in the distant future.
Get it? That’s the argument for the stay-the-course-in-stocks crowd. Oh sure, you can play around the edges—buy some more banks, sell some utilities, stay away from commodity names, but the central argument—keep owning the SP 500—isn’t changing.
It’s certainly a plausible explanation for why the world isn’t moving on the jobs number.
Still it’s hard to believe there won’t be some turbulence. One serious headwind for stocks: the continuing strength of the dollar, which is a major problem for foreign company earnings. There had been hope over the summer that the dollar strength was moderating, but that has not panned out.
The dollar index today is at its highest level since April.
This will continue to put pressure on commodities like copper and oil, and the earnings of companies in those businesses.
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