The volatility continues! Equities fell significantly for the third day in six. Friday’s catalyst was disappointing consumer confidence data, rallying dollar and a decline in oil.
Commenting upon the confidence data, consumer sentiment declined to a four month low because of weaker income expectations and a rebound in oil prices.
Bloomberg has an “Economic Surprise Index” which measures whether data beat or miss forecasts. Data is missing expectations by the largest amount since 2009 when the county was in the depths of the Great Recession.
There is one notable and large exception; the employment data. As widely discussed job creation has consistently surprised on the upside hence suggesting a change in monetary policy may come earlier than expected.
This potential change in monetary policy is a major reason why the dollar has staged a dramatic advance against most currencies, an advance that is threatening profit assumptions for the S & P 500
I don’t know why the vast majority of the data is missing expectations. Are the proverbial models broken? Are expectations to great? With this written, in my 30 years of experience, I have never witnessed such a bifurcation between most data points and the grand Daddy of all statistics—the jobs data.
Speaking of statistics, Tuesday is the commencement of the two day FOMC meeting. There are some aspects of the market, specifically the utilities, which are suggesting a change in monetary policy will occur in the intermediate future. The utility index is down about 7.5% for the year and around 13% from its January 28 peak. Wow!
The utility trade is very old and I believe most utilities are vastly over owned, the result of many searching for an income alternative. What is disturbing, the utility average would have to decline another 20% in order to reach the previous “average” low yield for this sector. Ouch!
As mentioned above, the dollar has been strong. Will the small caps vastly outperform their large cap brethren? The smaller capitalized issues primarily conduct their business in the US. As noted many times, approximately 52% of the S & P 500 sales are from abroad.
The markets this week will also be faced with host of housing and manufacturing data. How will the averages respond?
