Wednesday, December 04, 2013

Do Investors Really Prefer A Slower Economy?

Interesting action in the market in the first hour of trading.  The first economic report we got today was the ADP Employment Report, which was stronger than expected.  That caused a selloff in stocks and the S&P 500 fell nearly 10 points to touch the 1785 level.

But a half hour later the ISM Services report came out showing a slowdown from 55.4 to 53.9 in November.  There was also a slowdown in the new home sales figures that were released.  And with that slower data the stock market rallied back into positive territory.

Confused? It all comes down to the 'taper' expectations.  When the strong data came out investors reacted by selling stocks as they anticipated that the Fed would be more likely to taper sooner than later.  But when the weak data came out investors questioned that initial reaction and felt better that maybe the taper wouldn't come too soon, so stocks rallied.

Bond yields seem to be more concerned with the employment data, as the yield on the 10-year Note has spiked to 2.84% and not pulled back much.

We think that this type of back and forth logic is a bit silly.  It is true that the stock market has been fueled by the monetary accommodation of the Fed.  But the market should still fare well as the economy continues to improve.  A Fed tapering is different that a true tightening of monetary policy.  We are still years away from the Fed actually raising the fed funds rate, and even farther away from the fed funds rate getting to a level that risk-free assets start to look attractive from an investment point of view again.

Oil prices are higher again to $96.50, reversing the recent weak trend we had been seeing.  Gold prices are bouncing a bit to $1226, but still appear mired in a downtrend.

Trading comment: It looks right now like we could be seeing the same patter emerging in the stock market.  That is, the SPX has pulled back for 3 consecutive days and appears poised to bounce.  It also found support right at its 20-day average, which has held since early October.  On a percentage basis its hard to call the recent action a pullback.  It's more like a wiggle.  We have added a couple stocks to our trading accounts that are breaking out and look attractive - STX and NXPI.  Some of the lagging energy stocks continue to build bases (EOG, PXD, NBL, etc).

KAM Advisors has long positions in EOG, NXPI, STX


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