The major indexes are on track for a flat open ahead of Friday’s key jobs reading, with stocks ending the first quarter of the year in positive territory. It’s been a roller coaster ride for investors this year, with the major indexes making a strong run from last month’s lows after heading lower in the first few weeks of the year.
A combination of Fed-centric anxieties and steadily weakening corporate earnings outlook were the main drivers that gave us the earlier selloff. The weakness made sense as it was essentially an effort to bring stock market values in sync with underlying ground realities. Those realities included a Fed that had started monetary policy normalization after keeping interest rates pegged to the ground for an extended period and earnings growth turning negative.
While the earnings picture has only gotten worse since then, the Fed has modified its tune to some extent. The Fed told the markets that it expected to raise interest rates four times this year, though markets never really bought into that outlook. The markets were of the view that it will be hard for the Fed to raise rates in the back half of the year for political reasons.
The fact that economic readings lately have been less than inspiring has only strengthened the market’s Fed convictions. Janet Yellen’s statement the other day was effectively an effort to bring the Fed in-line with what the market was pricing in all along. In other words, the Fed decided to follow the market’s lead, not the other way around.
I am skeptical of the staying power of this stock market trend. The reason for that is that the Fed change is only temporary; the pace and trajectory of rate hikes may have changed a bit, but the overall normalization regime remains in place. It will be hard for the Fed to deny and go back on its earlier commitments as economic data starts improving in Q2 as the seasonality effects of Q1 softness starts wearing off in the coming days. We see this in labor market readings already, with tomorrow’s March non-farm payroll report showing gains in excess of +200K again and the unemployment rate reaching effectively full-employment levels.
Some market bulls are trying to strike an optimistic note about the earnings picture, relying on the recent weakness in the dollar’s exchange rate and stabilization in oil prices. I don’t see much basis for this earnings view, which will become clear in the coming days as companies report Q1 results and guide toward weaker outlooks for Q2.
The bottom line is that stocks may have done really well lately, but they aren’t likely to stick around for much longer. If you were bearish before, no reason for you to change your views now.
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