How were you feeling by last Thursday? Calm, perhaps, as the market came roaring back from a dreadful start to the year? But like an alcoholic stepfather, the entire week was one big, fat disappointment by the time the closing bell rang on Friday. Bottom line: the stock market wants to sell off. However, it also wants to keep you hooked for a little while longer before the next axe drops within the old portfolio that remains overweight oil stocks from January 2014 and tech names from 1999. How could I tell this is the market's mood at the moment? It's looking for excuses, and is twisting around well-documented news into some form of new news. In such an environment, it's best to stay the heck out of the way as the market is on the prowl for anything that could be spun into a negative.
The latest non-news event being spun by the psychotic Mr. Market? No wage growth in December in the United States of America. Oodles of jobs created last month, and indeed 2014 was a bounceback year that saw smaller crowds at the unemployment office or traffic to the state's website. But the quality of the jobs created in December and the prior 11 months suddenly is now unacceptable for a stock market that was bid up in 2014 on the premise the U.S. consumer returns to driving the economy this year and next. The ensuing fear you are likely to hear this week: nasty, nasty deflation strangling the U.S., and which will strangle the country even more as the mean Fed hikes rates in June.
Well, here is something you may have already been aware of: wage growth in America has been absurdly tame for years! Yet, the stock market didn't see paychecks that don't go very far in the aisles of Wal-Mart (WMT) -- though further than an unemployment check -- as an issue in November. The fact that apparently it's now such a deal-breaker for investors suggests stocks (using the S&P 500 here) outran a reasonable expectation for corporate fundamentals this year.
Source: Bureau of Labor Statistics
Hey, I don't make the rules of the investing game ... I simply try and analyze them. I would continue to hang back on adding new risk to the portfolio.
Here are a couple things to watch for in order to begin wading in the rivers once more:
- Alcoa (AA) doesn't upset the stock market: the most important areas of Alcoa's earnings report this week will be the outlooks for its packaging and gas turbine businesses for 2015. I want to receive a packaging number that tells me not to worry about the FedEx (FDX) earnings miss or weak global PMI readings. As for the gas turbine business, which already has experienced a downturn in new orders, I don't want to see an accelerated rate of decline compared to 2014 (was projected -8% to -12%). A large estimated decline would feed the market's sad mood in that the plunge in oil prices means bad news for the capex budgets (and job market) of many S&P 500 and Dow companies. Wildcard: if Alcoa does report that subpar gas turbine business and the market ignores it -- it would be a signal the lower capex thesis is almost priced into the market.
- CSX gets love: the market knows CSX's outlook for 2015 is for double-digit earnings growth. So, if CSX comes out and reiterates the guidance and the stock is hit, it would suggest the market is ready to penalize companies this earnings season that only reiterate guidance. In other words, the market would rationalize that it can't trust the outlooks given signs of slowing growth overseas. Personally, I am interested to see if CSX is able to maintain its 2015 guidance (factors: squeezed pricing, fewer shipments of crude) in light of the glut of oil that has spurred the headline-grabbing price downdraft. Here is what the company does in the crude oil business.