David Moenning

About the Author David Moenning

David Moenning is a the Chief Investment Officer at Heritage Capital, which focuses on active risk management of the U.S. stock market. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Dave began his investment career in 1980 and has been an independent money manager since 1987. Thus, Dave has been live on the firing line and investing for a living for more than 25 years.

Will the Data Bring the Bears Out of Hibernation?

bear brown


In case you missed it, the Bureau of Labor Statistics reported Friday morning that Nonfarm Payrolls, which is one of the most closely followed gauges regarding the state of the economy, was a big “miss” for the month of March. While economists had projected that the economy would create 245,000 new jobs last month, it turns out that only 126,000 new jobs were born.

For those keeping score at home, this was the fewest number of new jobs created in 15 months and the second biggest “miss” by analyst estimates since November 2008. What’s more the new job totals for the last two months were cut by a hefty 69,000, bringing the average for the first quarter down below 200,000.

Although markets were closed for trading Friday, the reaction in the futures market was swift. Bond yields dove as the 10-year quickly fell to 1.81% after the report (from Thursday’s close of 1.904%). And S&P 500 futures dropped a quick 20 points.

At issue here is the concern that the economy, which had been humming along at the end of last year, may be falling victim to more than just the unseasonably cold weather and the West Coast port strike. Our furry friends in the bear camp remind us that the ongoing rally in the U.S. dollar may be impacting more than just the profits of multi-national corporations and that oil’s swan dive is also putting a damper on the economy. Those seeing the glass as at least half-empty also point out that the U.S. consumer is most definitely NOT spending their savings from the gas pump.

If you will recall, the economic data has been coming in on the punk side for most of the year. And the only real bright spot has been the Nonfarm Payroll and Unemployment stats. After that one has to look long and hard to find data suggesting the economy is not slowing.

Is it Time for the Bears to Come Out of Hibernation?

So, with the economic data surprising to the downside and the earnings season expected to be uninspiring at best, should one be preparing for the arrival of the bears on Wall Street? Is it time to hunker down in cash and bonds? And should investors be looking for their helmets and curling up underneath their desks again?

Accompanying the fear that both the economy and earnings are about to be placed on the bear side of the ledger is the fact that this bull market is old by just about any measurement standard and stocks are now overvalued on an absolute basis. As such, it is fairly easy to argue that it might be time for one’s portfolio to do some ducking and covering.

But… There is No Recession in Sight

While the economic data has indeed been disappointing this year, it is important to remember that the chances of a recession at the present time are about nil. And let’s also remember that the biggest, baddest bear markets tend to be accompanied by economic recessions. So, unless there is some sort of external event that would toss the U.S. economy backwards, it is hard to see how something along the lines of 2000-02 or 2008 is going to materialize in the stock any time soon.

Don’t Forget About QE

If there is one thing investors have learned over the last 5 years it is that central bank intervention in the form of “quantitative easing” (aka QE) is a powerful prop for what the bankers call “asset prices” (which is Fedspeak for stocks and real estate).

In short, investors now know that money goes where it is treated best. And with trillions in fresh cash being printed by the central banks of the world, investors have learned that an awful lot of those dollars, yen, and now euros have found their way into the U.S. stock and bond markets.

All of the central bank intervention has, at the same time, created a currency war as countries all strive to keep the value of their currency low enough to encourage trade. And in reality, this “era of QE” has put a floor underneath any and all declines seen in the U.S. stock market.

Here’s the way the game has been played of late. Traders first begin to fret about this or that and program their computer to sell any and all advances. Stocks then move straight down for a spell (generally between 3 – 7 days) as the “fast money” all moves in the same direction at the same time. But then once the decline in the market reaches 3% to 5%, the buyers return (think QE cash being put to work) and the markets quickly go the other way – again in a straight line.

As such, one can argue that QE has been responsible for all of the V-Bottoms seen in the stock market over the past two and one-quarter years.

Yellen is Still Yellen

Although Friday’s Jobs report was indeed an eye-opener, let’s remember that the U.S. Fed is still part of the equation in the stock market these days. And the bottom line here is that unless the data suddenly does a U-Turn and begins to surprise to the upside early and often, a June “liftoff” in rates appears to be off the table.

A fair number of analysts have gone so far as to suggest that with data this weak, the Fed is likely to continue to err on the side of caution and rates will stay at zero throughout 2015.

Why does this matter, you ask? While it seems more than a little esoteric to the average investor, one has to keep in mind that the big hedge funds and investment banks still love their carry trades. And as long as rates remain at the zero-bound in the U.S., this little game can keep going. (“Party on, Wayne!”)

The Real Question

So, the real question of the day is this. Is there anything different this time around? Will the streak of punk economic data turn out to be anything more than what can be blamed on the weather, oil, and/or the port strike? And will we see the data begin to improve as the tulips begin to pop up through the snow?

And what about earnings? Will analysts actually get it right this time around? I.E. will EPS really decline on a year-over-year basis? And given that everybody on the planet already knows about the impact of the rising dollar, will anybody care?

In sum, what investors are left with at the present time is a fair amount of uncertainty. And with uncertainty comes “sloppy” price action. In short, during times like this, real buyers stand aside and the algos have their way with the indices on a daily basis.

The end result is a volatile, back-and-forth type of environment that is likely to continue until investors get some clarity on the future of the economy, earnings, and the Fed’s next move.

Turning to This Morning…

The vast majority of the global financial markets remain closed for the Easter holiday this morning. Most of the reaction in the press over the weekend is focused on the ideas that the economy should show signs of recovery in the near term and that a June rate hike is off the table. However, the overhang from Friday’s jobs report remains the focus of today’s trading in the U.S. It is also worth noting that the U.S. dollar is pulling back against the major currencies, which is igniting buying in commodities such as oil and gold. Analysts argue that the recent economic weakness means the greenback is overbought and due for a meaningful correction. Finally, stock futures in the U.S. point to a lower open on Wall Street.

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