It’s just a few minutes before the open on this smokey (I live in California) Thursday morning, and despite weekly jobless claims coming in higher than expected, and the U.S. dollar taking a sound beating this morning, U.S. equity futures just turned from notably red to nicely green. Hmm…
Actually, allow me to rephrase: Because jobless claims came in higher than expected, and the dollar’s taking a beating, U.S. equity futures just turned from notably red to nicely green this morning.
So why would weak economic news inspire a “strong” rally in stocks? Well, it’s all about what’s driving asset markets these days, and, frankly, that’s policy, 100%. Meaning, as long as policy is “supportive” of asset prices, investors believe asset prices will act accordingly. And policy is supportive of asset prices as long as the economy leaves policymakers with no other choice.
As for the dollar; why would a weak dollar lead to strong equity prices? Well, we’ve hit that one pretty hard herein of late, so I’ll just nutshell it with this from last week’s message:
“…given a perfect storm of global factors — a man-made (central bank-made) storm, that is — the dollar simply cannot be allowed to rise to any great or sustainable degree without catalyzing the crumbling of the most debt-laden economic edifice of our lifetimes…
Rising interest rates would, all else equal, make the dollar an attractive haven relative to other currencies, and, to the horror of foreigners holders of dollar-denominated debt, therefore see the dollar rise in value. The ensuing unwind of dollar-funded carry (borrowing in dollars, lending/investing in foreign markets) would serve to exacerbate the dollar’s upside, while tanking certain other nations’ currencies in the process.”
With regard to today’s selloff in the dollar, it honestly caught yours truly a bit by surprise, as it occurred at the behest of the European Central Bank.
You see, the Euro’s been resting at a very high level of late, which — given that it’s the predominant counter currency in the dollar index — makes for a low-level dollar. And a high-level Euro isn’t exactly what European exporters and, thus, the European economy necessarily find all that appetizing right about now. Nevertheless, the ECB met this morning and, as expected, left rates unchanged, and, unexpectedly, issued no verbal attempt to stem its rising tide. The Euro’s up .85% (that’s a big move for a currency) against the dollar as I type.
So back to the policy-driven U.S. stock market: Well, let’s just say that if the market is 100% trading on supportive policy, then economic factors that, ironically, might intuitively be viewed as non-supportive of stock prices are, well, supportive of stock prices. Hence the nearly-unimaginable disconnect between where stocks presently sit in terms of valuation and where reality sits in terms of the fundamentals.
So, as for market action of late: Was the market teed up to finally give way to economic gravity — hence the sharp 3-day Thursday-Monday selloff — only to be rescued this morning by bad data and the ECB?
Honestly, I don’t know, as the market is a virtually impossible thing to predict day-to-day, and, frankly, I don’t care. As a manager of other people’s fortunes, I care about risk. More specifically, I care about risk/reward; i.e., the risk/reward setup. And, for the moment, that “setup” demands that we stay uber-diversified, which means we own stuff other than stocks — like gold and groceries (both up more than stocks this morning, btw) — and keep a put hedge going underneath the stocks we do own to stem the potential downward tide until such time that market prices and macro reality once again meet, regardless of whether stocks are higher or lower from here at that time…
Thanks for reading!