The
subject of scorn earlier in the week, the speaker with a hawkish fork to
the tongue should now be the subject of praise, for in the end it was he
who saved the day--it was he who made possible the jubilant celebration of
euphoric relief that sent stock and bond traders scurrying to the nearest
phone to place buy orders on Friday.
The man who deserves the lion's share of
the credit for Friday's rally is Federal Reserve Governor Laurence H.
Meyer. His hawkish speech last Tuesday caused the market's myopic visions
and fears to focus squarely on the unemployment rate to the exclusion of
all else, thereby setting the stage for a powerful relief rally when the
number came in unchanged.
Despite
investors' relief that the unemployment rate didn't fall further, and
despite their belief that low current inflation readings equate to no
further interest rate hikes by the Fed, Friday's release of November
employment data will do little to sway the Fed either way. At best,
the report was neutral pending further data, at worst, it tilted the odds
ever so slightly towards the necessity of further Fed action down the
road.
The unemployment rate
remained steady at 4.1% in November as Nonfarm Payrolls increased 234,000
and average hourly earnings rose just 0.1%. The pool of available
labor increased slightly, but not enough to ease the tightest labor market
conditions in nearly 30 years.
The
increase of 234,000 nonfarm jobs, although down from October's revised
263,000 gain, still indicates a strong demand for new workers, and the
figure would have been even stronger if tight labor market conditions
weren't holding down the growth in nonfarm payroll numbers as employers
struggle to find qualified applicants. Combine the gains in nonfarm
payrolls with an increase in the average workweek and other recent demand
orientated economic data, and a picture emerges of an economy about to
enjoy another quarter of 5% plus growth.
While
the strong job gains, combined with a lower than expected increase in
average hourly earnings caused many to proclaim inflation dead on Friday,
we wouldn't be so quick to jump on the "boundless prosperity, no
inflation, the Fed menace is dead" bandwagon.
Many
of the pundits who were rejoicing the rebirth of the Goldilockian era on
Friday are also the same pundits who are oft heard to proclaim,
"technology and the Internet have changed the rules, it's a New
Era". In many ways they're right, and the rules have changed:
from Silicon Alley to Silicon Valley wages are often no longer the primary
draw in luring potential employees --instead promises of hefty stock
option packages have become the primary lure and constitute a large part
of a worker's total compensation.
While
the effect of stock options is not adequately reflected in the average
hourly earnings figures, its effect is fully felt by the economy as the
wealth effect fuels economic growth. Wage growth may have been
subdued in November, but the sharp rise in the value of stock options
during the month as technology and Internet stocks surged to almost daily
new record highs is sure to be felt in the form of rising consumer
confidence and rising consumer spending in coming months--hardly the sort
of activity that signals the economy is about to slow to a more
sustainable pace or that labor market tightness is about to ease, and
hardly the sort of activity that suggests the threat of further Fed moves
has passed.
Going forward, an
economy growing at an unsustainable pace is likely to be the least of the
market's problems. Complacency and euphoria remain the stock market's
biggest problems, and leave it extremely vulnerable to any unexpected
events.
The degree of complacency
among the traditional 'buy and hold for the long term' investor is
particularly troubling. The most recent investor sentiment poll of
its members by the American Association of Individual Investors shows 62%
are bullish and only 13% bearish--readings that normally signal a top is
approaching.
Monday's profit
taking in the wake of Friday's sharp runup was to be expected, and the
market will likely pick up where it left off and continue higher for a few
more days, or weeks, or perhaps even months, before this blowoff top
reaches the final peak, but with each step higher, the danger grows, and
the distance the pendulum of market sentiment is likely to over swing to
the downside when the final top comes increases.
Friday's
employment report may have been better than expected, and all three major
averages may be trading near record levels, but we wouldn't lose sight of
the risks posed by the other side of the coin: consumer-fed economic
growth remains at levels that will likely force the Fed's hand in the
coming months, and despite new records by the S&P and NASDAQ on
Friday, more stocks on the NASDAQ and NYSE lost ground last week than
gained.
Getting swept up in the
euphoria of the moment is always the most tempting near the end of a move
as the last holdouts finally succumb, but we would resist its pull and
keep one eye out for possible exits, and remember that historically
parabolic rises are followed by even steeper falls--the question of how
far the market will overshoot to the downside depends on the resolve
of those investors who are 'in it for the long term'. We have
a feeling that resolve may be a little weaker than many expect if history
holds true to course.
