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The Big Bang Theory: Inflating the Stock Market

The popular theory that accelerating price inflation in the U.S. would eventually be detected has gone many years with little evidence.

It does not take a Ph.D. to see that we may be witnessing a big bang in inflation. The popular theory that accelerating price inflation in the U.S. would eventually be detected has gone many years with little evidence. However, signs that inflation has probably bottomed are now showing up everywhere.. The Consumer Price Index, the most commonly cited and used measure of inflation, averaged 1.4% over the past year, but rebounded from 1.1% in February to 1.5% in March…

Inflating the Stock Market

The Weakest Earnings Cycle in 55 Years

This has been the weakest earnings cycle in 55 years. Every earnings cycle

over the past 55 years has generated about a 7% annualized earnings per

share (EPS) growth rate, when measured from peak to peak or from trough

to trough. The best multi-year earnings cycle measured from prior peak

to the next peak was an annualized 9.1% and the worst 5.6%, with most

clustered tightly around the average of 7.3% This is notable given

the differing levels of inflation, interest rates, and economic growth that

companies had to adapt to in each cycle. However, the current cycle — while

not yet over — has been much weaker than the average, generating only a

2.8% annualized growth rate from the prior cycle peak in the second quarter

of 2007 through the first quarter of 2014.

The Weakest Earnings Cycle in 55 Years.

Jobs Looking for People Redux

As reported by the Bureau of Labor Statistics of the U.S. Department of Labor last Friday, April 4, 2014, the private sector economy added 192,000 net new jobs in March 2014, despite another round of unusually cold weather in most of the nation during the month. As of March 2014, 116.1 million people are employed in the private sector economy in the United States, a new all-time high. The prior peak for employment was at the onset of the 2007 – 09 Great Recession in January 2008, when the economy employed 116 million people. It took the economy 74 months to get back to the prior employment peak….

The Labor Market Hit a Milestone in March 2014, Finally Surpassing the Pre-Recession Peak on Employment….

Jobs Looking for People Redux

Labor Market Report Card

The unusually cold, snowy, and generally disruptive winter weather that gripped large portions of the United States in December 2013, January 2014, and February 2014, persisted into March 2014, but the severity waned a bit in March. While much colder-than-usual temperatures were present in six of the nine U.S. Census regions in early March, and several snowstorms hit the Midwest and eastern United States, fewer power outages and flight cancellations occurred nationwide than in a typical March — all of which suggests that weather will still be a factor in the March employment data, but not as big a factor as it was in the prior three months….

Labor Market Report Card

Giving Credit to High-Yield Credit

The Federal Reserve (Fed) reintroduced interest rate risk in the bond market last week. Corporate bonds, particularly lower-rated high-yield bonds, weathered the rise in rates better than most sectors. Bond prices overall are generally higher so far in 2014, and high-yield bonds remain expensive relative to history, but that does not mean that the sector cannot still offer value for investors. Credit quality is generally good, funding conditions are favorable, and defaults may remain low — all of which support higher-than-average valuations. High-yield bond valuations must also be taken in the context of a bond market with limited opportunities. High-yield bonds and lower-rated debt may still offer attractive opportunities in the bond market….

Giving Credit to High-Yield Credit

March Madness in the Markets

 With the exception of last year’s steady rise, March has been maddening for investors. In three of the past four years the S&P 500 raced higher in March only to reverse all of those gains in a pullback of about 10% that began in late March or April. It later took stocks at least five months to climb back to the peaks of March.

As the NCAA tournament gets down to its own sweet sixteen while the rest of March plays out, it is a good time to reflect on the competing drivers of the markets that may make for an exciting showdown in the weeks and months to come….

March Madness in the Markets

Europe’s Big Bet

Bond yields have fallen this year, but they began to rebound in the United States in the latest week as the glass-half-empty bond market realized the all-time high stock market may have it right. But this was not the case in most of Europe. The ongoing decline in European government bond yields continued last week and is striking when considering how fast they were rising two years ago. What a difference a couple of years can make. The 10-year Italian and Spanish bond yields dropped to near all-time lows at the end of last week, while Greece’s 10-year — once over 35% — fell below 7% . Problem solved? Not exactly…..

WMC 2014.3.10

Janet Yellen’s Employment Report

This Friday, March 7, 2014, the U.S. Department of Labor will release the Employment Situation report for February 2014. The Employment Situation report is two reports in one; the household survey generates the headline unemployment rate, while the establishment survey generates the nonfarm payroll job count. The unusually harsh winter weather across a large swath of the nation in February 2014 will likely have a major impact on the employment data in February. As of early Monday, March 3, 2014, the consensus of economists as polled by Bloomberg News is looking for a net increase of 154,000 private sector jobs in February 2014, after the 142,000 gain in January 2014. Prior to the 75,000 weather-impacted gain in jobs in December….

Janet Yellen’s Employment Report

The Real Reason for the Rebound

The first market storm of 2014 (that we had named Angel) is over with the S&P 500 and broader Russell 3000 stock market indexes rebounding to all-time highs after reversing a 6% decline. The decline was sparked by turmoil in emerging markets (EM) and weak economic data here in the United States in what amounted to a “growth scare.” Stocks have rebounded even though conditions in EM, measured by bond yields and credit default swaps, have not improved much, and the U.S. economic data continue to disappoint economists’ expectations [Figure 1]. Also, the Federal Reserve has communicated no change in path or message as a result of these developments. So what turned stocks around from their intraday low point on February 5? It was most likely fading concerns over weaker growth and deteriorating conditions for EM….

The Real Reason for the Rebound

Lies and Charts

A comparison of the S&P 500 Index in 1929 just ahead of the stock market crash to the performance of stocks from 2012 through today has been making the rounds on the internet. The implication by the bears is that stocks are poised for an epic crash….

Lies and Charts