Wall of Worry..."Don't Worry Be Happy"
Between Inflation woes, concerns over the Fed tapering bond purchases, and supply chain/labor issues, there seems plenty to worry about. I think Bobby McFerrin said it best in his famous (1 and only hit), "In every life we have some trouble, but when you worry you make it double." These fears, or the Wall of Worry, have some legitimacy, but we have to take it in with the whole picture. We can't spend an inordinate amount of time looking at the trees in lieu of the forest. Here's what we're seeing so far this week...
Economic Picture (the Forest). If we step back from a lot of the noise, it's easy to understand how the economy is progressing and what the current situation looks like in reality. I hate to be the constant nag on reminding that the media love negative news and creating worry. Hence the slogan, "If it bleeds, it leads." The economic picture in the U.S. is on solid footing. For example, when the National Financial Conditions Index (NFCI) is below zero, the index is indicating looser-than-average financial conditions - which is a good thing! The NFCI has been below zero, and declining, for 54 consecutive weeks now.
In addition, the increase in our Wealth Protection Signal has been primarily driven by the VIX (volatility) and not by the TED Spread (fear). While the VIX has increased 6% since March 16th, the TED has decreased 26% over that time period. Instead of being over-stressed with a Wall of Worry, we need to keep the things in perspective. At its current level, the Wealth Protection Signal is recommending 0% allocation to cash as a defensive position.
Economic Picture (the Trees). If we step into the forest, there are certainly some trees that need to be trimmed. Inflation is moving higher. There are supply chain issues. Labor shortages abound. Not all of the "trees" are ripe with disease, however. The housing market is facing some setbacks, partially due to a lack of supply of homes, partially due to inflation, and partially due to a labor shortage. Both Building Permits and Housing Starts disappointed analysts' expectations for April. In fact, new homes that received permits, but were not started increased 5% last month and home completions were down 4% last month. A quick look at the increase in Lumber Prices gives us a clue as to why.
Weekly Jobless Claims came in lower for the 3rd consecutive week and beat the market's expectations. The Empire State Index was better than expected, but lower than the previous month. The index of Leading Economic Indicators moved higher. While not all the data was good, it was also not all bad. Tomorrow, we'll get the flash reading on the Markit Manufacturing & Services PMIs. Also, we'll see what Existing Home sales looked like in April.
Meanwhile, the investors got hot-and-bothered by the minutes from last month's Fed meeting. During that meeting, Fed governors apparently discussed the idea of tapering bond purchases. The market didn't like the fact that the governors were even "discussing" the idea. Yet, no indication of exactly when such tapering would begin was offered - only, IF the economy makes "sustained progress." The economy, while continuing to improve, still has a good ways to go from an employment / GDP standpoint to get back to normal. Speaking of employment, 22 states have moved to drop the $300 weekly federal jobless benefit boost in a bid to encourage the unemployed to get back to work amid sky-high levels of job openings and business hiring woes. Time will tell if this helps get people back in the workforce, but so far, we've seen Pandemic UE, Emergency, & Extended benefits decline 1% over the last two weeks.
Pandemic Entering Last Phase. It is my hope that this will be one of the last times I'll need to provide information on how the pandemic is affecting the economy as the global numbers continue to plummet. Cases here in the U.S. are now down to 2.9% on a daily basis. While cases are still too high in India, the number of daily cases has declined substantially over the past few weeks. The 7-day average of cases in India has dropped 28% since the peak on May 8th. Meanwhile, the mortality rate from COVID in India remains one of the lowest in the world at 1.1%.
According to the CDC and Johns Hopkins, more than 279 million people in the U.S. have received at least one dose of the COVID vaccines. This represents 84% of the population, plus those who have already been infected and it would appear we have already reached herd immunity. When we look at the data (compiled by First Trust Advisors) now compared to 2019 & 2020, we can certainly see progress in some areas, but more work to do in others. Retail Sales are back up to pre-pandemic levels. Hotel Occupancy and Restaurant Reservations are nearly back to pre-2020 levels. The airline industry is still struggling with only 65-70% of the traffic levels for commercial flights when compared to before the pandemic. As more and more cases diminish and the virus dwindles, those areas hit hardest by the pandemic can finally heal and life can get back to normal. In other words, "Don't Worry, Be Happy!"