The Dow Jones Industrial Average closed up by 700 points today, or by 2.1 percent. The S&P 500 Stock Index rose by 2.3 percent. And, the NASDAQ Composite rose by 2.6 percent. The basic reason behind these moves?
The monthly jobs report showed that employers added 223,000 jobs in December, although it was more than the 200,000 expected. Wage growth slowed.
Average hourly earnings rose by 4.6 percent from the previous year, down from the 4.8 percent increase in November. And, these numbers were well below the March peak.
This is the state of the economy right now… mixed news, but with some very good implications. Higher hiring but lower wage gains. This kind of news can go a long way. And, that is what we are seeing over and over again.
There is this very good bit of news in this sector. However, in another sector, the news is not so good. The good news leads investors to believe that the Federal Reserve will make a “pivot” soon and get out of its program of quantitative tightening.
The “not so good” news leads us to investors thinking that the Fed will continue on with its tightening exercise and make things worse off. So, the stock market goes up in one case. The stock market goes down in the other.
This is what is making it so hard to make “heads or tails” in the stock market these days. The economy, one day, is producing some very good news. Then the next day, the news is not so good at all.
There is sunshine one day and clouds and storms on another. To me, this is a sign that the economy is very much in disequilibrium. There are two reasons for this in my mind.
First, there has been the spread of the Covid-19 pandemic that has caused all sorts of problems almost everywhere in the economy. There are supply chain problems, labor issues, government stimulus results, and war, among other things going on.
Second, the economy has lots and lots and lots of money floating around. Debt markets have been profuse in their abundance of funds to finance just about anything going on.
For over a year now, I have been writing about the asset bubble that the Federal Reserve created to fight off the effects of the Covid-19 pandemic.
We had the stock market in the United States ascending up to its new historical high on January 3, 2022.
We had the price of Bitcoin reach a historic high in early November of 2021. And, the “blank check world” prospered and prospered until it ran out of steam in the last month or so.
Still, massive amounts of money exist within the banking and financial system that still is searching around to find new opportunities to make money.
The “excess reserves” in the banking system still total around $3.0 trillion at the beginning of 2023.
A lot of this money is sitting on the sidelines believing that the Federal Reserve is going to “pivot” sometime soon, and the stock markets will rise and rise and rise, providing major profits for those that have concentrated on the Federal Reserve’s monetary position and have waited for the Fed to run out of patience and loosen up on its monetary activities.
This is exactly why you get a runup in stock prices like what occurred on Friday, January 6.
Here is the year-over-year picture.
In other words, the Federal Reserve has been tightening up its monetary policy, yet the vast quantities of money “hanging around” are just waiting for any kind of indication that the Fed is going to make its pivot.
This, I think, gives one a picture of how much work the Federal Reserve really has to do. The question, therefore, is, can investors outwait the Federal Reserve?
A stock market rally of 700 points is not an insignificant movement. Could it have been even higher? My answer to this is very definitely yes.
The Federal Reserve has pumped trillions of dollars into the U.S. financial system. A very large part of these trillions seems to be waiting for the next market move.
So, investors with money just wait around for “news” that will send stock prices up… like the move today.
On the other hand, investors are watching every move of the Federal Reserve just to catch an “eye wink” that indicates the Fed is thinking “pivot.”
Bottom line: there may just be too much money hanging around from the Federal Reserve actions over the past two or three years to really remove this investor thinking.
If so, then the next two years or so are really going to see a battle. The Fed created the situation! The Fed is learning that it is going to have to live with the situation.
Not a pretty picture, at all.