Market Update

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Market Update

3/18/16

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What a difference a month makes. Just 30 days ago many investors were thinking about going to the mattresses (with their money) or, perhaps, hiding under them. Stocks were getting crushed, as fears over China, Europe, Zika, and a Fed on the move overwhelmed the markets. Oil was trading at $26 a barrel and the 10-year Treasury yield hit 1.66%. We cautioned that there were none of the traditional signals of a pending recession here at home. Stocks had hitched their wagon to oil prices and the drop in both had little to do with the health of the US economy. No matter – when people (and markets) want to panic, they’re going to panic.

Since then, things have turned around noticeably. Oil is approaching $40/ bbl, the S&P 500 has bounced back to within 5% of its historical high and the 10-year Treasury is flirting with 2.00%. While some pundits will point to the European Central Bank’s (ECB) decision to expand its QE (quantitative easing) program this week as a catalyst, the improvement has been apparent for several weeks now.

A month ago, we were looking at the chart we like to drag out from time to time to show the markets’ blood pressure and we were trying to decide if it was short-term (fear-related), or something more serious. As you can see on the updated chart following, the stock market’s blood pressure (the red line depicting the VIX volatility) has relaxed significantly from early February, while assets are rising (stock, commodities).

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The week after the monthly employment report is an economic wasteland, with little news of import. Still, there was some news to chew over. The Fed released its quarterly report on US Household Net Worth and, at the end of 2015, the net worth of US households hit another record high. No matter whether you look at nominal figures, real (inflation-adjusted) figures or on a per-capita basis, there is continued wealth accumulation here in the US.

The per-capita net worth of each individual in the US has been growing, on average, around 2.4% annually since the Fed began tracking this series back in 1951.

As the graph below shows, debt levels remain relatively low (around $14.5 T – about the same level as 2008), while financial assets rose 33% and real estate about 8% since 2008. Total household net worth reached $86.8 trillion, which is about 33% higher than the combined value of all global stock markets combined (about $64.6 T).

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We’ll leave it to the politicians to debate on how equitable is the distribution of this wealth, but it is this growth of wealth that creates jobs and the means by which our country runs.

Every week we get a look at new claims for unemployment. Last week, claims fell to the lowest level since mid-October (259,000), and just above to 40-year low set last July (255,000). The fourweek average fell to 267,500 for the best reading since November. Weekly claims have remained below 300,000 now for 53 consecutive weeks. These are not recessionary numbers.

The rest of the world is having a rough time and weakness overseas presents headwinds for the growth of US exports for the time being. Still, there’s nothing to suggest weakness in the purchasing power of the US economy. The US is not in a recession. The job market continues to expand, US consumers’ financial positions are relatively strong, and the housing recovery still has a ways to go. Investors are concerned, as evidenced by the price of gold and other “protection” assets like TIPS. Higher gold and TIPS prices mean that investors worry that future inflation will be higher than the markets expect. With global central banks in full ease mode (and the US is still “easy”), and rising commodity prices, they may be right. That will mean higher interest rates as well.

The Fed meets this week. Few expect any change in rates at this FOMC meeting, given the global turmoil, but the markets will watch closely to see how the Fed views the current economic environment – and to try to determine the Fed’s plans for the rest of 2016.