A three-day weekend is just what the market needed after one of the most volatile trading weeks that I can remember. It'd be nice to think that stocks rallied on Friday in observance of Presidents Day on Monday, but I'm afraid there are only economic forces at work here.
Friday saw the S&P 500 rise nearly 2% on decent volume and close at its highs for the day. Considering all of the carnage that occurred last Thursday on high volume, it's safe to say that the sellers were exhausted -- or at least they seem to be for now.
Up until Friday, the "America Is in a Recession" narrative was building in the financial media. That was true even though U.S. weekly unemployment claims resumed their downward trend to historically low levels and the Atlanta Fed boosted its first-quarter GDPNow forecast to 2.5% from a previous 2.2%.
But to the chagrin of the "recessionistas," January U.S. retail-sales data came in much better than expected on Friday morning. For example, core sales came in at a +0.6% for the month vs. the 0.3% analysts had expected.
To put that in perspective, core sales for all of 2015 averaged just 0.2% monthly gains. A 0.6% gain isn't the kind of reading that recessions are made of. Consumption drives the U.S. economy at the end of the day, and the January retail figures showed that Americans are consuming.
I also noted that my favorite retail indicator -- so-called "non-store retail sales" (i.e., online shopping) -- rose 1.6% for January and 8.7% year over year. As you can see below, it's tough to find a better-looking chart:
People will no doubt continue on with all of their recession talk, but as they say: "That's what makes markets!"
We also got good news last week from one of Federal Reserve chair Janet Yellen's favorite labor indicators, the Job Openings and Labor Turnover Survey (or "JOLTS").
As I discussed recently, I was expecting the JOLTS report to show a pick-up in the so-called "quits rate" to go along with January's strong U.S. nonfarm payroll numbers and December's rise in average hourly earnings. (The JOLTS report lags by a month, so we just got December numbers last week).
Sure enough, that's exactly what the JOLTS report showed, along with a near-record amount of U.S. job openings:
When we look at the relationship between job openings and quit rates, it's hard to feel anything but optimistic about future employee-earnings gains as companies compete to retain good workers. That's what happens in a tight labor market.
And if we look at the historical relationship between U.S. job openings and continuing-claims data, we could very well see a further drop in claims levels:
This is why it's important to keep an eye on weekly claims data. After all, claims represent actual people entering or leaving the workforce, not mere statistical samplings done to calculate, say, the U.S. jobless rate. So, claims data are a real-time gauge of America's labor market.
The Bottom Line
Some very smart people in the financial media are pointing to the yield curve's flat shape and saying that it's predicting a U.S. recession.
My problem with this theory is that it assigns omniscient ability to an indicator that's ultimately driven by investors. Unless the people trading Treasuries have god-like abilities, I think looking at the yield curve can no more predict a recession than checking out a Magic 8-Ball.
While the yield curve did provide good insight into inflation and rate expectations in the years prior to the Fed's Quantitative Easing program, QE has stripped it of that ability. I believe that massive worldwide central-bank interventions (especially zero and negative interest-rate policies) have made the yield curve's predictive value a hollow shell of its former self.
Taking this a step further, I don't personally believe that any financial or commodity market is "smarter" than the rest. Asset prices take their cue from supply and demand, which are ultimately driven by future economic expectations. That's why I believe a correct assessment of the macroeconomic situation is the key to being on the right side of a trade.
I think the U.S. job market is the only thing investors should trust for predictive powers these days. I believe employment is a leading indicator, not a lagging one as many think.
What's on Tap
We have some A-list data points coming up this week, including the U.S. Producer Price Index, Consumer Price Index, housing starts, industrial production and the Philadelphia Fed manufacturing survey.
Given the recent uptick in both the Institute of Supply Management and Markit manufacturing data, I think we could see a bounce in the Philly Fed and industrial-production numbers. Still, I don't expect much from U.S. manufacturing other than perhaps some slight reversion to a lowered mean.
The good news is that the week seems to be off to a good start so far, with Asian markets higher. The bad news: It's only Tuesday!
