Bulls Maintain Conviction Edge Over Bears
Wage Inflation “Remained Subdued”
Why does the stock market care about wages? If our paychecks get bigger, we have more money to spend. If we have more money to spend, that adds to demand pressure in the supply-and-demand balance. Increasing demand for goods and services can lead to higher prices for those good and services. Higher prices means higher inflation figures. If inflation rises, the Fed is more apt to raise interest rates sooner rather than later. Wednesday’s Fed Beige Book contained a friendly tone regarding wages. From The Wall Street Journal:
“The tone of the Beige Book report was cautiously optimistic, suggesting that the Fed continues to see expansion continuing across much of the U.S.,” said Gennadiy Goldberg, U.S. strategist at TD Securities…Overall wage inflation “remained subdued in October and November,” the Fed said.
Trends Speak To Economic Conviction
When the net aggregate opinion of all market participants is favorable, markets tend to push higher. Conversely, when the net aggregate opinion becomes pessimistic, markets tend to drop. Moving averages help us monitor the market’s pulse. During a correction, the S&P 500 (shown in black below) tends to drop below the colored moving averages. Also note the slopes of the colored moving averages (MAS) tend to roll over during sharper pullbacks in equity prices. The bullish period on the right side of the chart looks quite a bit different (price above MAs, slopes of MAs are positive).
How Does The Market Look Today?
As noted in this week’s video, the present day market shows the bulls are maintaining a conviction edge over the economic bears. Wednesday’s Beige Book did little to alter the previous statement. The chart below is as of the close on December 3, 2014.
Investment Implications – The Weight of The Evidence
On October 24 with the S&P 500 trading at 1964, we noted the potentially bullish implications of an unprecedented move in the VIX Fear Index. Fast forward to the present day and the S&P 500 sits 110 points above the October 24 level. Since the bigger picture remains constructive, we continue to maintain an equity-heavy (NYSEARCA:SPY) allocation with a minimal exposure to bonds (NYSEARCA:TLT). With the European Central Bank meeting Thursday, it is important to keep an open mind. If the bears can turn the tide, it will begin to show up in the data and charts, something that has not happened yet.