We don’t specialize in the stock market, but we spend a lot of time trying to understand why the stock market, as a whole, might rise or fall. It helps us understand capital flows across and between global financial markets.
Much ink has been spilled lately about a “real” recovery in the US having arrived … finally.
Sure, some recent data suggest recovery. But is it any different from the last time the R-word was in style?
Here are a couple items atop the recovery evidence list:
- Rising payrolls
- Falling unemployment
- Rising inflation
There is more, like regional Fed data and manufacturing indices and retail sales. For good reason, the US stock market has outperformed its foreign peers based on the expectation that growth in the US will be relatively better than growth in other developed economies.
But could recovery optimism, and US stock market gains, be derailed?
It is said payrolls are a lagging indicator of growth. They can be influenced very much by market and economic sentiment. (Though I suppose rising payrolls can reinforce improved sentiment in a self-fulfilling fashion.)
A popular stat being passed around lately is the impact rising crude oil has on the economy. That is, for every $0.01 increase in the price of crude oil $1 billion is sapped from consumers.
Of course, the actual impact of crude prices on economic growth can be debated. Some say the withdrawal of discretionary spending due to increased spending on gasoline still makes its way through into the economy and thus won’t necessary stunt a recovery. But even there, the overall impact may depend a lot on the pace of rising fuel prices (faster increases mean greater negative impact on consumers.) And turning to sentiment again, consumers may postpone discretionary spending based solely on uncertainty in fuel prices.
Here is a couple Reuters charts from two weeks ago suggesting what high prices might mean for payrolls and economic activity (note the simultaneous growth in payrolls and oil prices as well as the subsequent collapse):
And note the speed at which the ISM manufacturing index dropped once crude topped out:
But rather than monitoring payrolls (in case they are merely a lagging indicator) perhaps it makes more sense to monitor consumer sentiment:
Consumer sentiment turned sharply higher in the third quarter of 2011, before the payrolls began showing noteworthy increases in the first few months of 2012. So what will win? Will the added jobs prop up consumer sentiment? Or will persistently high gasoline prices weigh down on sentiment and manifest itself in the form of a drop off in payrolls?
Bloomberg, last Friday, suggested the latter may be starting:
Confidence among U.S. consumers unexpectedly dropped in March as this year’s 17 percent jump in gasoline prices threatens to squeeze household budgets.
The Thomson Reuters/University of Michigan preliminary index of consumer sentiment fell to 74.3, the lowest this year, from 75.3 the prior month. The gauge was projected to rise to 76, according to the median forecast of 70 economists surveyed by Bloomberg News. A government report today showed that consumer prices rose in February by the most in 10 months, with gasoline accounting for 80 percent of the increase.
I would guess the powers-that-be are in full PR mode, willing to do whatever it takes to bolster consumer confidence (after all, it is an election year.) So it will be particularly interesting to see how the Federal Reserve handles QE3/low interest rates/rising prices, because shoring up sentiment is very much what monetary policy has been hinged upon.
The Fed will stay loose as they monitor how the economy responds to fuel prices. But if and when economic data responds to high fuel prices and dips in consumer confidence, the Fed looseness cease to be a factor for equities, at least in the short-run.