Markets are providing conflicting information and investors are unsure of what moves to make next. Can investors have the best of both worlds - risk-on and risk-off? That's the premise of this week's market musings.
This week's musings is inspired by the 202 film "Sweet Home Alabama." There are dozens of memorable lines as a young lady tries to figure our which man is best for her.
This movie surprised everyone with a huge box office of more than $180 million on a meager budget of $30 million.
This was the first film to shoot in New York City after the September 11th attach on the World Trade Center.
Despite being about Alabama, most of the film is shot in Georgia.
The plane used by the character Jake is made to land on water. It is illegal to land a plan on Lake Peachtree, so the Peachtree City Police issued the film's production company a $300 ticket when the plan was filmed landing on the lake.
The film is based on producer Stokely Chaffin's real life. Chaffin was raised in Tuscaloosa, AL and changed her name after she left the South. She gave the story to screenwriter Jay Cox and insisted he visit the state of Alabama before writing the screenplay.
Here's what we've seen so far this week..
You've Got A Baby...In A Bar. Sometimes, things are just out of place. When the market senses that something is off, the fundamental data takes a bit of a backseat to investors sentiment.
This morning's Jobs Report for December is putting a damper on the market. While the number for December (+256,000 jobs) was much higher than expected, it makes the case for fewer rate cuts. In fact, after the report was released, futured on Fed funds dropped for future rate cuts until potentially June. Just yesterday, the Fed's Board member Bowman stated, "The December interest rate cut should be the last." Just this morning, Bank of American changed its Fed Rate forecast to suggest that the rate cutting cycle is over. Equities are selling off as a result.
While the unemployment rate dropped in December from 4.2% to 4.1%, it's the number of jobs revised lower that should have the markets' attention. Over the past 18 months, 12 of the reports (67%) have been revised lower in subsequent weeks after release. This month's report was no different. Instead of November's solid gain of 227,000 jobs, the number was revised lower by 15,000. This paints a picture that perhaps the job market is not as solid as advertised.
One might want to point to the pick up in the JOLTs Job Openings released earlier this week. However, though the November data was better than expected, the underlying data shows a stagnant job market. Both Job Quits (those leaving their current job) and Job Hirings (companies bringing on new employees) are both in decline. This data would jive with the fact that Nonfarm Payrolls have been revised lower in 2024. Some things just don't belong, like the friend of Melanie's in "Sweet Home Alabama" who greets her at the local bar. After being complemented by her friend, who is holding her child, Melanie replies, "Thank you. Look at you, you have a baby...in a bar."
You Can't Ride Two Horses With One Rear End. As the "Sweet Home Alabama" character Earl Smooter says to his daughter Melanie with regard to her potentially loving both men in her life, "You can't ride two horses with one a$$, sugarbean."
Last year, stocks enjoyed low volatility and were relatively range bound when it comes to staying above their respective 200-day moving average. However, in December, that trend changed. Equities peaked in early December and broke below the 200-day range in mid-December. This indicates that the lack of breadth has finally forced the market out of its trends from 2024.
While the Fed cut 3 times in the 2nd half of 2024, interest rates have moved higher. The yield on the 10yr Treasury has risen more than 100 basis points while the Fed has cut rates by 100 basis points. The interest rate on the 30-year mortgage continues to rise to 6.93%, forcing mortgage demand lower. Equities are responding to the rise in yields with trepidation.
As we pointed out last week, volatility was low last year and the intra-year correction was tame by historical standards. We could be simply resetting valuations and expectations from elevated levels. Equity sector strength is low, which indicates that equity returns going forward could be lower after two consecutive years of +20% returns. For investors, we have continually recommended a sound financial plan with a diversified investment strategy. That is the best course moving forward. Any concentrations should be considered risky and potentially trimmed.
Baby in a bar...some things just don't fit.
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Disclosures
The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.
Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.
Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.
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