Saturday, March 10, 2018

Quote of the Day: More than Goldilocks

In yesterday's blog post we suggested that the stock market (participants in the aggregate) -- based on its strong positive response (Dow +441) to the February jobs report -- is betting that interest rates will remain tepid despite the economy picking up some real steam. 

Our suggestion lies partly in the fact that when January's healthy jobs report featured a surprise pickup in wages (exceeded estimates, while February's missed) -- presumed inflationary -- the market tanked (Dow -667):

click to enlarge...

In fact, we could argue that January's report (a nice top line beat with a healthy wage increase) was actually healthier than February's (huge top line beat but with below-estimate wage growth). And, frankly, January's jibes more with much of the other data we parse week in and week out. 

Now, respected economist Mohamed El-Erian uses the Goldilocks metaphor in a way that we essentially agree with, beyond the first sentence that is

Per Bespoke Investment Group:
This afternoon, former PIMCO executive and Harvard endowment head Mohamed El-Erian (now Chief Economic Adviser at Allianz) tweeted the following:
“#Markets right to respond enthusiastically to the jobs report. On a stand-alone basis, it’s more than “Goldilocks”. Points to both higher growth and stronger potential. Supports the hypothesis that the #economy is able to exit new normal of low and insufficiently inclusive growth.”
It's not that we think the market wouldn't be "right to respond enthusiastically" to vastly improved conditions, but that's not what we're thinking inspired Friday's rally, at least not entirely. We're fairly certain that for now the market thinks the cake "higher growth and stronger potential" comes with lower interest rate ice cream. And we think the temperature is such that the ice cream will melt a bit faster than the market's presently pricing in. 

All that means -- as we stated yesterday -- is that we expect a continued high level of volatility as the market adjusts to the bullish reality Mr. El-Erian pointed out yesterday: One, by the way, that very much fits with our view of present conditions. 

I.e., it (rising interest rates) at this juncture doesn't spoil the dessert for the patient long-term investor (who stays away from bonds, utilities and the like)...

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