Crossing Wall Street Review – May 12, 2017
By Eddy Elfenbein, editor of Crossing Wall Street and portfolio manager of the AdvisorShares Focused Equity ETF (NYSE Arca: CWS)
Earlier this week, the Volatility Index (VIX) dropped to its lowest level in more than 24 years. The stock market just ain’t doing a lot of moving around lately. Charlie Bilello points out that over the last 13 days, the S&P 500 has traded within a range of 1.01%. That’s the narrowest range for a 13-day period on record.
Overall, the low-vol environment has been very good for stocks. This week, the S&P 500 jumped to yet another all-time high. The bulls were pulling for the index to close above 2,400 for the first time, but it just wasn’t able to cross the finish line. Three times in four days, the S&P 500 closed within a point of 2,400.
Earlier this year, I said that I was expecting a modest pullback in the stock market. Nothing major, but enough to burn some of the momentum players. I’ll give myself partial credit. The market did indeed drop a bit, but not as much as I had been expecting. From March 1 to April 13, the S&P 500 lost a mere 2.8%, while I had been expecting something closer to 5% to 7%. Since April 13, stocks have been quite strong.
Last Friday, the government said that the U.S. economy created 211,000 net new jobs in April. This was a big relief for investors because the report for March was a dud: just 98,000 net new jobs.
This highlights an important lesson for investors—don’t be carried away by an outlier. Most economic data contains at least some “noise.” Traders love to pick up on one-point trends, and get carried away. Instead, we want to focus on the larger trends, and the economy continues to create new jobs.
For April, the unemployment rate fell to 4.4%, which is a 10-year low. We actually came very close to making a 16-year low, but the figure for March 2007 stood in our way. Splitting out the decimals, unemployment rate is currently at 4.404%, while it was at 4.398% for March 2007. That was the low for the last cycle. The unemployment rate is lower now than it was at any point from March 1970 to March 1998.
For me, the larger issue is wages, and that’s still pretty blah. Last month, average hourly earnings rose seven cents to $26.19. The year-over-year change has decelerated, meaning the rate of growth has fallen, for the last two months.
There’s a lot of talk about the declining workforce participation rate, but that’s largely driven by demographics. More folks are retiring, and that shrinks the available workforce. Looking past the participation rate, the jobs-to-population ratio is currently the highest since January 2009. The broader “U-6” employment rate is down to 8.6%. That’s the lowest since November 2007. So there is some real improvement.
While this report was a relief, I still believe that it doesn’t warrant another Fed rate increase next month. I’m afraid my view is in the minority. According to the futures market, traders currently put the odds of a rate hike in June at 81%. What about after that? The odds currently stand at 56.5% for still another hike to come in December.
As I explained last week, the mild economic news during the first quarter should put any Fed plans on hold. I’m especially concerned about the weak wage figures. This past earnings season finally saw some revenue growth. I hope to see more, and that can be best achieved by putting more money in consumers’ pockets.