Markets Run Into the Wall of Worries
Well, given the rise in stock markets of the last few weeks and the astronomical jumps of the markets from their late March lows, a decent pullback was in the cards. The reason for the pullback, on the other hand, is hotly debated. Taking a look at those astronomical jumps, investors saw the S&P 500 up by over 40% since March 23rd; NASDAQ up almost 50% since then and the smaller–cap Russell 2000 up even more than NASDAQ.
While the reason for the pullback is anyone’s guess, it is likely a combination of a bunch of Worry Bricks that make up a Wall of Worries, including:
- Worries about another wave of coronavirus cases as states open up more;
- Worries about continued social unrest in cities across the country;
- Worries about future economic growth, especially with the Fed suggesting that rates might remain close to zero through 2022; and
- Worries that the markets jumped too far and too fast.
While most will just focus on the ending weekly declines, at the beginning of the week, the markets did hit a few key milestones: the S&P 500 was briefly positive for the year and NASDAQ was way past that 10,000–point threshold. But, then the Worry Bricks started piling up.
Fed Leaves Rates Alone
On Wednesday, the Federal Reserve met and unanimously voted to leave short–term rates unchanged but will “increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.”
Here is what the Fed said about the economy and its outlook:
“The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health have induced sharp declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
Deflation on the Horizon?
On Wednesday, the Department of Labor released CPI numbers for May and there was a chorus singing deflationary tunes for the rest of the week.
The U.S. Bureau of Labor Statistics reported that:
- The Consumer Price Index for All Urban Consumers declined 0.1% in May on a seasonally adjusted basis after falling 0.8% in April
- Over the last 12 months, the all items index increased 0.1% before seasonal adjustment
Further, it was reported that:
“Declines in the indexes for motor vehicle insurance, energy, and apparel more than offset increases in food and shelter indexes to result in the monthly decrease in the seasonally adjusted all items index. The gasoline index declined 3.5 percent in May, leading to a 1.8–percent decline in the energy index. The food index, in contrast, increased 0.7 percent in May as the index for food at home rose 1.0 percent.
The index for all items less food and energy fell 0.1 percent in May, its third consecutive monthly decline. This is the first time this index has ever declined in three consecutive months. Along with motor vehicle insurance and apparel, the indexes for airline fares and used cars and trucks declined in May. The indexes for shelter, recreation, medical care, household furnishings and operations, and new vehicles all increased.“
This data was another Worry Brick, as deflation is now a real possibility as this is the first time in over 60 years that core CPI has dropped for three consecutive months.
Gold Rises When Treasury Yields Fall
The Board of Governors of the Federal Reserve System tracks changes in consumer credit as well as the dollar value of consumer installment credit and provides the data to the public every month.
Here is the April data for Consumer Credit released on June 5th:
For comparison, consumer credit contracted at an annual rate of 3.3% in March. Much of April’s decline was directly attributed to the impact of COVID–19, as consumers had fewer opportunities to spend.
The JOLTS Report
The Labor Department created the Job Openings and Labor Turnover Survey – the JOLTS Report – which tracks monthly changes in job openings as well as job offerings and “quits.”
Unlike other reports that track employment data, the JOLTS reporting period lags by a month, although it does provide additional color to the employment landscape.
On June 9th, it was reported that in April: