With the volatility index (VIX) and NYSE volumes +21% and +41%, respectively (yesterday), the fear factor associated with the unknown was real. Now we all know what we didn’t know. The US unemployment rate dropped, sequentially, by 30 basis points (month-over-month) to 9.7%.
The reality is that both, relative to freak-out expectations, and on an absolute basis, this morning’s US unemployment report was better than feared. That, however, doesn’t mean the stock market has to go up.
My US Strategy partner, Howard Penney, and I made a call earlier this week that whether this report was better or worse than expectations, that the US Dollar was going to go up and the US stock market was going to go down. Some people quibbled with the math behind our conclusion, but that’s ok – that’s what makes a market. Today, on a better than feared unemployment report, the Buck Breakout continues and stocks remain weak.
A lot of people are used to seeing better than feared economic reports support higher stock prices. To some extent, its Pavlovian. The US economy is not in a “great depression”, even though those who short sold last year’s generational stock market squeeze are rightly depressed.
Everything that really matters in our macro model happens on the margin. Relative to bombed out expectations, the last 6-9 months of economic data has been much better. Now, relative to complacently high expectations, the next 3 months of data might just keep coming in as just that – complacently high.
Better than anything that resembles a required “emergency level of zero percent” Federal Funds rate, will continue to pressure Bernanke to see the data for what it is. This, relative to expectations, is the real reason why stocks are deflating. As the Fed prepares to remove the “extended and exceptional” language from their currently politicized monetary policy, the Buck Breakout will continue to manifest to the upside, discounting the same.
It’s somewhat unnatural for the manic on CNBC to understand this concept; but better than feared economic news can be bad for stocks, indeed. The US stock market’s REFLATION trades that we were riding last year (based on a Burning Buck) are completely unwinding as real-time risk managers come to grips with the reality that ZERO is not a perpetual monetary policy – not with GDP up +5.7% y/y, CPI +2.7% y/y, and the unemployment rate rolling over at least.
Keith R. McCullough
Chief Executive Officer