• Scott Poore, AIF, AWMA, APMA

We're Back To, "Good News is Bad News" Again

Some strong economic data released this week is being disregarded due to Fed speak and inflation fears. In the movie the "Bad News Bears," Coach Buttermaker tells his players, "Come on, fellas. Rome wasn't built in a day." By the way, spoiler alert, if you haven't seen the movie the Bears went from worst in the league to 2nd and played for the championship. The recovery has been uneven at times, but a recovery we are witnessing. Yet, whenever news leaks of Fed governors speaking of tapering bond purchases, the market has a little hissy fit. Here's what we're seeing so far this week...


Solid Economic Data. Earlier this week, the manufacturing data came in better than expected. The ISM Manufacturing Index reached 61.2 in May, versus 60.9 expected and 60.7 in April. Similarly, the Markit Manufacturing PMI came in at 62.1 for May, higher than April's 61.5 reading. The Services data was strong, as well. ISM Services & Markit Services PMI were both higher than the previous month and beat market expectations. The Investors Business Daily Economic Optimism survey improved from 54.4 in April to 26.4 in May. Today, the ADP Employment report showed the highest one-month growth since July of 2020. More than 970,000 private sector jobs were added in May, which will help offset the labor shortage issue we have in the U.S. following the pandemic. In addition, Weekly Jobless Claims dropped below 400,000 for the first time since the pandemic began. That's 5 consecutive weeks of declines in Claims! Unit Labor Costs are on the rise, which is not good in terms of Inflation. However, that also means that employers are willing to pay to bring people back into the workforce. The Jobs Report this morning indicates that the labor market is still healing. Last month's report was revised higher by 12,000 jobs. May's number disappointed, but the economy still added more than twice the number of jobs versus last month. All of the good economic releases are confirmed by the Fed's National Financial Conditions Index indicating strong financial conditions in the U.S.


What's Driving Markets? Two different Fed governors this week mentioned the idea that tapering of bond purchases by the Fed should begin. Two weeks ago when Fed minutes revealed that Fed governors were beginning to discuss tapering, the market lost its mind. That's what we saw yesterday. The broad indices are off about 1% in early trading yesterday despite the great economic news. The great news, you see, means that the economy is recovering and the need for further stimulus is really not necessary. At some point, the market is going to have to come to the realization that tapering of bond purchases is overdue. At the same time, you have individual one-off stocks that are making things seem frothy. As of Wednesday's close, AMC stock was up more than 2,800% year-to-date on "meme-trading." Reddit users had pushed the stock higher in spite of large hedge fund bets on the short side. However, the train ride may be over for AMC investors as the CEO announced a 2nd sell of shares and publicly shared concerns of future risks for the stock at current elevated prices. Yesterday, the stock was down more than 17%. The VIX is currently off one-month lows as it set in a new floor at the 15.4 level on April 14th and got close to that level earlier this week, only to bounce higher. If the VIX stays below the 50-day moving average, expect volatility to stay subdued for now. If the VIX moves above the 50-day MA, then we could see some choppy trading ahead. This short-term choppiness shouldn't be confused with a long-term trend, as the chart below shows lower highs on the VIX starting in October of 2020.


Waning Virus Concerns. Most states have now removed mask mandates and have mostly, if not fully, re-opened. The numbers in the U.S. for Cases, Deaths, & Hospitalizations are the lowest they have been since the beginning of the pandemic. Even the Fed's Beige Book, a report on current economic conditions in each of the 12 Federal districts in the U.S., showed that the economy grew at a faster pace in April/May compared to earlier this year. The reason? Consumer spending picked up as a result of increased coronavirus vaccination rates. The U.S. has now administered more than 296 million doses of the vaccines and leads the world in the percent of population fully vaccinated. India, the primary concern a few weeks ago, has picked up the vaccination effort. More than 43 million people have been fully vaccinated in India, but that only represents 3.5% of the population. However, the vaccination efforts are having a dramatic effect on cases & deaths. The 7-day average of cases in India has declined 61% since the peak on May 8th and the same average for deaths has declined 22% since the peak.