INSIGHTS
JAN
7
COSTA’S CORNER: COULD THIS BE THE START OF SOMETHING BIG?
Over the last 10 years I have seen reactions to bad JOBS reports and I have seen reactions to good Jobs reports and depending on the Feds stance, it’s usually fairly predictable.
In the past, the Fed has watched these reports very closely and based monetary policy on the data we see and the data we don’t.
In the past, the Fed has been pretty predictable. A good JOBS report, we want to rein in growth a touch, and we should raise interest rates.
A bad JOBS report, we want to stoke growth a touch so lets do nothing or maybe add some liquidity to the market and see what happens.
Granted, its not an exact science but for the last 10 years its seems to have worked.
Markets reacted accordingly, a good JOBS report, rising interest rates, lets sell.
A bad JOBS report, Fed easing, let’s buy.
That went on unabated for years until this past Friday. The JOBS report was not just good, it was great. More people working, higher wages, more people looking for jobs. A full growth economy is what it said.
Wait, that’s bad because the Fed will act harshly and raise rates even more.
Hold on. Not this time. The Fed, I believe finally gets it. They are finally going to use common sense and keep their plans for rate hikes in 2019 very flexible.
This is a very good thing. I have always felt that the Fed should not get in the way of the economy and maybe this year, they won’t.
After Friday’s rally, here are the questions people are asking: “Have we reached the bottom?” “Will the bull market return?”, “Will this volatility continue?”.
Like everyone who has been in the business for a few years will tell you, it’s never a good thing to try and pick a bottom to a major selloff. You are usually wrong and it ends up costing you or client’s money so I won’t do it but I will tell you a few key things to watch for to better gauge what’s going on and where the market will be heading.
With any major correction, there tends to be that inflection point where the markets tend to abruptly turn around. Volatility on the out is almost as bad as volatility on the in and you may just have witness that abrupt about face on Thursday and Friday of last week.
Capitulation. It’s when, in laymen’s terms, people through up their hands and get the Hell out. Thursday had that feeling of capitulation. Selling for the sake of selling and getting out because you don’t have a choice.
Normally, it doesn’t happen the first trading day of the year because in reality, you have all year to make up for your mistakes of last year. Managers have already taken it on the chin, no need to start off a new year doing it, but yet it happened.
Again, I will put part of the blame on ETF’s and the computer generated, take no prisoners approach to trading they employ. Might it have been a carryover of the unwinding being done through the end of December? I think so.
With that selling done (or overdone), Fridays JOBS report was stellar and Chairman Powell’s bullish comments, the market reacted the way it should.
So does that mean a turnaround has begun? Possibly. I think you need to see a few things first:
An upward trend this week and next. Disregard the spikes, look for the trend. Even if you see a half percent gain by next Friday, it’s a trend.
An increase in Merger and Acquisition flow. Companies usually try and take advantage of a cheaper buying environment when they feel markets have bottomed. Why pay top dollar when you can get a nice deal at a significantly lower price. The people that run major companies are a lot smarter than us. They know when to buy.
This may be counter-intuitive and every major firm will disagree but when people tell you the end is near, it’s usually not. That is a strong signal that we have turned the corner. So, when you see highly intelligent, very well paid analysts tell you that there is a recession near or the market still has 10-15% to go on the downside, start buying.
As far as the increased volatility we have been seeing lately, all I can say is that this will be the new norm for a while.
These things usually have an extended lifespan and considering that we had almost 16 months of peace as markets raced toward new highs seemingly everyday, you have to take it for a little while longer.
Model portfolio is the same, for now.
50% Stocks
25% Fixed Income
25% Cash
As I said early, I will need to start seeing some trends before I reallocate.
In the past, the Fed has watched these reports very closely and based monetary policy on the data we see and the data we don’t.
In the past, the Fed has been pretty predictable. A good JOBS report, we want to rein in growth a touch, and we should raise interest rates.
A bad JOBS report, we want to stoke growth a touch so lets do nothing or maybe add some liquidity to the market and see what happens.
Granted, its not an exact science but for the last 10 years its seems to have worked.
Markets reacted accordingly, a good JOBS report, rising interest rates, lets sell.
A bad JOBS report, Fed easing, let’s buy.
That went on unabated for years until this past Friday. The JOBS report was not just good, it was great. More people working, higher wages, more people looking for jobs. A full growth economy is what it said.
Wait, that’s bad because the Fed will act harshly and raise rates even more.
Hold on. Not this time. The Fed, I believe finally gets it. They are finally going to use common sense and keep their plans for rate hikes in 2019 very flexible.
This is a very good thing. I have always felt that the Fed should not get in the way of the economy and maybe this year, they won’t.
After Friday’s rally, here are the questions people are asking: “Have we reached the bottom?” “Will the bull market return?”, “Will this volatility continue?”.
Like everyone who has been in the business for a few years will tell you, it’s never a good thing to try and pick a bottom to a major selloff. You are usually wrong and it ends up costing you or client’s money so I won’t do it but I will tell you a few key things to watch for to better gauge what’s going on and where the market will be heading.
With any major correction, there tends to be that inflection point where the markets tend to abruptly turn around. Volatility on the out is almost as bad as volatility on the in and you may just have witness that abrupt about face on Thursday and Friday of last week.
Capitulation. It’s when, in laymen’s terms, people through up their hands and get the Hell out. Thursday had that feeling of capitulation. Selling for the sake of selling and getting out because you don’t have a choice.
Normally, it doesn’t happen the first trading day of the year because in reality, you have all year to make up for your mistakes of last year. Managers have already taken it on the chin, no need to start off a new year doing it, but yet it happened.
Again, I will put part of the blame on ETF’s and the computer generated, take no prisoners approach to trading they employ. Might it have been a carryover of the unwinding being done through the end of December? I think so.
With that selling done (or overdone), Fridays JOBS report was stellar and Chairman Powell’s bullish comments, the market reacted the way it should.
So does that mean a turnaround has begun? Possibly. I think you need to see a few things first:
An upward trend this week and next. Disregard the spikes, look for the trend. Even if you see a half percent gain by next Friday, it’s a trend.
An increase in Merger and Acquisition flow. Companies usually try and take advantage of a cheaper buying environment when they feel markets have bottomed. Why pay top dollar when you can get a nice deal at a significantly lower price. The people that run major companies are a lot smarter than us. They know when to buy.
This may be counter-intuitive and every major firm will disagree but when people tell you the end is near, it’s usually not. That is a strong signal that we have turned the corner. So, when you see highly intelligent, very well paid analysts tell you that there is a recession near or the market still has 10-15% to go on the downside, start buying.
As far as the increased volatility we have been seeing lately, all I can say is that this will be the new norm for a while.
These things usually have an extended lifespan and considering that we had almost 16 months of peace as markets raced toward new highs seemingly everyday, you have to take it for a little while longer.
Model portfolio is the same, for now.
50% Stocks
25% Fixed Income
25% Cash
As I said early, I will need to start seeing some trends before I reallocate.