Even though last week's January jobs report was disappointing and didn't show strength in the labor-market recovery, the markets celebrated, with the Dow and the S&P 500 both posting gains for the week.
Why this head-scratcher? It was likely interpreted as a "Goldilocks" report—not bad enough to slow tapering and not good enough to speed it up—and investors divined that the Fed will continue gradually winding down its asset purchases. And although tapering was always expected to be distasteful to stock-market investors, it clearly appears more palatable when the yield on the 10-year Treasury remains low—which it did most of last week at under 2.7%.
This is the Great Tapering Paradox: Tapering is creating turmoil in emerging markets, which is creating fear in the US. That, in turn, is resulting in a flight to safety within the bond market, which is placing pressure on yields.
"We expect more twists and turns in the stock market in the coming weeks, and consumer spending should slow further."
Scary Days in D.C.?
Something else happened last Friday that was perhaps more momentous: The US blew past the official debt-ceiling deadline that Congress set last fall, when it cobbled together a temporary solution.
With this missed deadline, the Treasury must now take "extraordinary measures" to enable the US to meet its obligations on time, according to US Treasury Secretary Jack Lew. Further, Lew has underscored that the February 27 deadline for resolving the debt-ceiling issue is a hard-and-fast date, thanks to all the expenditures that occur this time of year.
While some may be counting on a resolution before the end of February, there is little time for the two political parties to agree on a compromise. Republicans are reportedly working on a proposal but, given that Congress is in recess part of this month, the window for negotiating may be closing.
Ultimately, we're likely to see a resolution by February's end, but don't be surprised if we see some bumps along the way.
Reading the Revolving–Credit Tea Leaves
One more important event occurred last Friday: the release of December's consumer-credit number, which showed a significant increase in revolving credit— billion more, to be exact. It was the largest jump since May 2013 and the third-largest increase of the five-year-old economic recovery.
This rise could be interpreted positively as a sign that consumers have become more optimistic and are increasing their purchases. But it could also be an omen that consumers can't make ends meet and are actually borrowing to pay for day-to-day expenses.
Unfortunately, it might be the latter, given the significant flaws in the labor market, the lack of wage increases and lackluster consumer sentiment.
A Roiling Market
Looking ahead, we expect more twists and turns in the stock market in the coming weeks, and consumer spending could slow further for three reasons:
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Consumer sentiment is likely to remain wanting in the near term, with lower-income consumers maintaining their negative views because they haven't participated meaningfully in this recovery, and higher-income consumers feeling less positive because of the stock-market drop.
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The expiration of emergency-unemployment insurance is already calculated to be affecting well over 1 million people.
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The debt-ceiling debate may cause more jitters.
The Economic Recovery Continues-Just Not Smoothly
Still, volatility in stocks, especially downside volatility, doesn't mean the economic recovery is ending—it's just uneven and probably taking a breather.
Keep in mind that the ISM Non-Manufacturing Index, which represents a much larger part of the economy than ISM Manufacturing, posted a strong number last week, including a nice improvement in employment.
What's more, earnings season has proved to be better than expected, with a significant increase over recent quarters in the percentage of companies whose revenues have met or beaten expectations.
So what's an investor to do, especially those who have been fleeing stocks and stock funds over the past few weeks?
Unfortunately, there are no magic potions to make the present feel better or crystal balls to make the future more clear. Investors just need good old-fashioned patience and an opportunistic spirit to look for occasions to add to equity exposure on the twists and turns that move the stock market lower.
Kristina Hooper, CFP, CAIA, CIMA, ChFC, is US head of investment and client strategies for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
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Purchasing Managers' Indexes (PMI) are economic indicators derived from monthly surveys of private sector companies. The Chicago-PMI survey registers manufacturing and non-manufacturing activity in the Chicago region. Investors care about this indicator because the Chicago region somewhat mirrors the nation in its distribution of manufacturing and non-manufacturing activity.
Thomson Reuters/University of Michigan Surveys of Consumers is a consumer confidence index published monthly by the University of Michigan and Thomson Reuters. The index is normalized to have a value of 100 in December 1964. At least 500 telephone interviews are conducted each month of a continental United States sample (Alaska and Hawaii are excluded). Five core questions are asked.
The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.
Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.
A Word About Risk: Equities have tended to be volatile, involve risk to principal and, unlike bonds, do not offer a fixed rate of return. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets.
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