November 9, 2015
Last week U.S. major equity indices capped a six-week rally that drove risk-related asset prices within 3% of a 52-week high as shares rebounded from August lows. These lows were indicative of global economic and financial market turbulence, emerging market headwinds and a deteriorating China economy. Global central bankers appeared inclined to continue accommodative measures to support fragile growth. China’s five-day assembly suggested Beijing would be more disposed toward stimulus measures to support growth of around 7% over the next five years; the Bank of England appeared unlikely to move interest rates higher, given a more cautious outlook on inflation and European Central Bank President Draghi promised officials would reexamine the sufficiency of the QE program at December’s policy meeting.
Friday’s robust nonfarm payroll number surprised on the upside, however, providing a basis for the Fed to refrain from its preferred path of normalizing interest rate policy. This has shifted the question from “when?” to “how much?” Nonfarm payroll report Results were strong throughout the report with 271,000 jobs added. This is the largest jump since last December. The previous month’s number was revised higher by 12K and the unemployment rate notched lower at 5.0% from 5.1%. Finally, we saw a 2.5% year over year increase in average hourly earnings. This is the largest increase since 2009. According to CME Group data, Fed fund futures Friday showed the odds of a December rate hike stood at 70%, up from 58% before the jobs report and 38% prior to the latest Fed policy statement.
We remain overweight equity assets in this environment and the prospects for a December Federal Reserve rate hike have now risen to the point where they have become the consensus. The extreme bear market sentiment in August has nearly vanished and strategists are revising their targets back upwards.
- The 10-year Treasury yield is testing 2.30%, up by nearly 40 basis points and back to July’s highs
- The dollar has begun to strengthen
- Small-Cap U.S. equities are lagging
- Price to earnings ratios remain high given lackluster earnings growth
- New 52-week highs aren’t expanding
- Market breadth remains narrow.
These are all indicators that suggest this rally is tenuous and could roll over swiftly and resume the bearish trend at any time. Therefore, we will continue our disciplined approach to risk management and reduce exposure if conditions continue to deteriorate and the markets fail to hold its recent gains with any authority.
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