July 16, 2013

What a Long Strange Trip It Still Is

I had a strange experience this morning. Reading the news from the overnight markets, which by the way, isn't the strange part, I was wondering how the market would react to today's employment data. Most notably is the fact that recent market activity seems to hinge on whether the Federal Reserve will indeed taper its stimulus activity, which has been bad for the stock market but should be good, or maybe a disappointing number would ensure ongoing stimulus, which has been good for the stock market but should be bad. See what I mean...strange?

So what makes sense?

First off, I think today's' unemployment data was very strong. New hiring kept a pace that has been present since the beginning of the year and even with summer hires, the data slightly alters the prevailing negative outlook for the economy. As I believe the outlook for stronger growth into the end of the year is suggested by the employment picture, the greater reason rests in my belief that a population that works is a population that consumes.

Interest Rates
Another situation that makes sense centers on a very unruly (i.e. higher rates) interest rate environment. The concern that stimulus activity will be tapered has sent interest rates higher, and rightly so. Interest rates hold the clearest connection between concerns that strong growth can have on inflation and investor demand for higher rates to compensate them for those concerns.  While this would have negative impact on stock behavior, I believe it will be temporary because the Federal Reserve can approve the level of interest rates necessary to assure manageable inflation, which the stock market loves.

US Dollar
A number of foreign countries have embarked on stimulus programs similar to those taken in the US. And since the beginning of the year the US Dollar has reacted by strengthening against its biggest trading partners such as the European Euro, Japanese Yen and Australian Dollar. But another more important reason is that economic growth left unchallenged will develop inflation, and a strong currency is disinflationary. As with rates, the evidence that inflation is held in check will reward investors in stocks.

To ponder current constructive economic conditions anchored by a strong employment situation I hope it's easier to see how the Federal Reserve "tapering" its stimulus activities will ultimately signal a self sustaining economy. In the meantime if some speculators want to sell stocks on that basis you can count on me being first in line to buy.