Bull market depends on just the right amount of wrong
The resilience of the U.S. stock market this summer has a lot to do with just the right amount of wrong with the world.
The strong run of job creation this year, pickup in industrial production, sturdiness in corporate profits and snap-back in GDP growth in the second quarter has already arguably been baked into investor expectations and stock prices.
Yet flare-ups of global turmoil and the stubborn overhang of idle American workers are combining to keep world interest rates low and central banks generous.
The brinksmanship between Russia and Ukraine and civil war in Iraq are dimming optimism and have stoked risk aversion in Europe and the Middle East, driving benchmark German government bond yields below 1% and dragging U.S. Treasury rates (^TNX) to new 2014 lows. This is, for now, supporting financial markets more broadly.
In the meantime, the good news on jobs, with the unemployment rate falling from 7.3% to 6.2% in the past year, would normally have investors on high alert for the Federal Reserve to accelerate its plans for lifting short-term interest rates from zero. In this case, investors are taking comfort in the “Yeah, buts” of this recovery.
Yeah, we’ve created 200,000 jobs a month for five months. BUT, the persistence of underemployment and the steep drop in the active labor force is a concern – and it’s foremost in the mind of Fed Chair Janet Yellen, who has repeatedly emphasized that until the job market tightens more convincingly, she will remain patient on rates.
With official inflation readings remaining tame, she can easily justify this stance, as she likely will try again to do Friday in her speech to the Fed’s annual Jackson Hole conference.
The fact that the economic recovery hasn’t yet raised the average workers wages much is bad news - and that means lower rates for longer, and that is taken as good news by dip-buying investors, who have kept stock-market selloffs from going too deep or too long for more than two years.
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