It’s proving hard to keep a good market down. Despite a laundry list of factors that would seemingly weigh firmly against equities, the S&P 500 sits little more than 3% below its early-September high, comfortably above its 200-day moving average and has barely taken on a correction. This is in the face of looming Fed tapering; concern over China’s real estate market and financial-sector repercussions; inflation and more inflation; oil prices pushing $80 this week; stretched valuations, especially if interest rates back up; and a long overdue unwinding of some bullish complacency. Interestingly, stocks peaked at almost precisely the same time last year (early-September), falling 9.3% peak-to-trough before setting off on a late-year rally at the end of October. It’s starting to rhyme.
Back in the economy, U.S. payrolls disappointed on the headline with a 194k job gain in September, versus consensus expectations of 500k. But, there were plenty of redeeming qualities including prior-month revisions, some seasonal quirks, bulk job losses in the public sectors (private payrolls were up 317k), solid hours, a strong household survey that pulled down the jobless rate to 4.8%, and continued strength in wages. Markets pretty much came into this week under the assumption that anything resembling a decent employment report would give the go-ahead for a Fed tapering announcement next month—and this one fully qualified as decent. The next policy phase looms right ahead for equities.
|Table 1 - Market Performance|
|Source: BMO Economics, Bloomberg|