Wait, what?

Wait, what?  Stocks slumped yesterday as investors remembered that new tariffs could be just a week away.  In the wake of last Friday’s blowout numbers, reality began to set in.




  • Back to reality.  Last Friday, the Bureau of Labor Statistics released its monthly employment situation beating economist estimates by a proverbial mile… at least it felt that way if you were watching the equity markets.  The report showed that +266k new jobs were created last month and that the unemployment rate ticked back down to 3.5%, a 50-year low.  While that certainly is good news for the limping economy, the market’s reaction seemed a bit out of sorts.  Let’s get some perspective here.  A Non-farm Payroll number of Friday’s magnitude is not all that uncommon.  In fact, the moving average of payrolls was +235 in January of this year at which time BLS announced a +312k increase in hires.  Moreover, looking back further, one would note that the growth in jobs was not at all out of the ordinary.  But this time, things were a little different.  If we, for a moment, put aside the trade war, investors’ biggest fear this year is the potential for a recession. In recent month’s, the fearful sentiment seems to have abated somewhat, as consumer confidence appears to be hanging in there.  This, despite the fact that economic numbers have recently been missing their mark.  The Citi Economic Surprise Index has been hovering just above the zero mark having entered the quarter above 40.  The index, maintained by Citigroup Global Markets tracks economic releases relative to expectations.  When beats exceed misses, the index is positive and vice versa.  So Friday’s numbers may have been a relief to those hidden fears of recession that still remain, sparking the large move in equities.  If we look at the bond markets for some answers, we get a slightly different picture.  Remember that bonds are a more accurate telltale on the state of the economy, rising when things get rough and falling when the economy is surging.  A strong jobs figure would certainly move the bond markets, more so if the jobs figure indicated that the economy was booming.  In last Friday’s session, as stocks popped, 10-year treasury yields only increased by +2 basis points, which is a relatively small downward move in prices.  That indicates that bond traders do not feel that the economy is out of the woods just yet.  Investors should take heed… caution is still warranted.
  • From beyond the grave.  This weekend former Federal Reserve Chairman Paul Volcker died at the age of 92.  Volcker served as the Fed Head from 1979 through 1987.  Though some of my regular readers were not even born during his tenure many of us still remember the markets during that period.  Let’s take a quick peak back.  When Volcker was elevated from his post of New York Fed President to Chairman by President Carter, inflation was close to 15%!  The US GDP after years of growth began to contract in 1980 sparking fears of stagflation, which is a rare occurrence when inflation is high and an economy is shrinking.  Remember the Feds dual mandate?  Fight inflation and protect jobs.  Back then, fighting inflation was a real thing, though it may not seem like it in today’s benign inflation climate.  Between January of 1979 and March of 1980, the Fed raised short term interest rates from 10% to 20% to fight inflation.  That’s right overnight loans cost 20% and 30 year mortgage rates got as high as 18% in 1980.  The rapid rise in interest rates certainly did the trick to fight inflation, but they also served to push the economy into a recession.  The Fed rapidly lowered interest to pull the economy out of the recession and later raised them once again, but even higher, which once again pushed the US Economy into a recession by the summer of 1981.  All of that in just two years.  The point I want to make here is that the Fed, during that time was very different than the Fed of today, which seems more concerned with investor sentiment than wild swings in inflation, interest rates, and GDP growth, though those things do get the occasional mention.  Finally, it is worth noting that Paul Volcker came back to serve under the Obama Administration to head the Economic Recovery Board.  During his time in that post, he lent his name to the Volcker Rule, which put restrictions on banks in the wake of the financial crisis.  In 2010, as he testified in the Senate on the restrictions, he famously warned that if banks were given free rein  “…I may not live to see the crisis but my soul is going to come back and haunt you.”  The Volcker Rule received much criticism in its time, mostly and not shockingly from banks.  In February 2017, President Trump signed an executive order directing the Treasury to review the restrictions with the aim at relaxing them.  No crisis has ensued yet, but Volcker’s soul will surely be watching.





Stocks slipped yesterday as Friday’s jobs sugar high wore off and investors were reminded that more tariffs are due to kick in next Sunday.  The S&P500 dropped by -0.32%, the Dow Jones Industrial Average fell by -0.38%, the Russell 2000 ticked down by -0.26%, and the NASDAQ Composite Index sold off by -0.40%.  Bonds advanced and 10-year treasury yield slipped by -2 basis points to 1.81%.




– The Fed’s FOMC begins their policy meeting today.  They will announce policy tomorrow, followed by a press briefing.

– The Treasury will sell $24billion 10-year notes today.

– Autozone beat expectations this morning and Game  Stop will release after the close.

– WHILE YOU SETTLED IN WITH YOUR COFFEE, reports surfaced that officials on both sides are preparing a framework to delay the December 15th tariff hike.  Stock futures erased earlier deficits and now point to a positive open.

daily chartbook 2019-12-10


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