The market open this morning suggests it has other things on its mind, other than the Fed and its tapering timetable. In fact, the strong surge into the green after the jobs report came out suggests it actually does care about the fundamentals, that positive economic numbers do matter, that all that writing I have been doing about the tapering issue is nonsense is, well, right on.
The reality, folks, is the jobs number is the single most important number to the Fed, along with the inflation number (and that is benign) and that number came in bigger than expected to the positive. Time and again, the Fed has stated, and the market understands this thoroughly, it is keeping an eye on employment to ascertain when it will begin to cut back on its QE program. With this report, the likelihood that the Fed will begin tapering sooner rather than later is higher. And what happens? The market goes up.
The reason the market opened strongly in the green and not the red this morning is simple – the market cares about the economic fundamentals and the employment report is one of the most important fundamentals. It tells the story of the US consumer, the underpinning of the US economy. The other story, you know the one about the Fed and how the market fears tapering, is well, more in the fiction realm, more like 50 Shades of Fear, a weak story, poorly written, but having an eager audience that makes it a big hit. As long as the US consumer is working, happy, and spending money, the market is going higher. It is as simple as that.
- The preliminary reading for the University of Michigan’s Consumer Sentiment Index for December was reported at 82.5, which was well above the consensus for a reading of 76.1 and also above last month’s final reading of 75.1.
If the number above proves to be as good or better in the final reading, it would suggest the US consumer is getting happier. Added to an employment base that is increasing in size, one should assume the US consumer will spend more money this holiday season and into the future, which will drive higher profits, which will push the market higher.
Yet, the simplicity of my logic seems lost on the breathless media. In its drive to ratchet up interest, it often follows the path of most complexity. It takes the simple and convolutes with half-truths and poor analysis. Consider the following, for example.
- Consumers have feasted on discounts this holiday season, but it means thinner profit margins for retailers from Wal-Mart to Neiman Marcus, and car makers, a red flag for investors who have ridden a sector rally all year.
It is true that retailers offer huge discounts to lure in shoppers for this highly competitive shopping season. It is also true that retailers set the price falsely higher at the starting point, so the discounts don’t bite quite as hard. All the big dogs do it. It is not collusion; rather it is an accepted practice that everyone knows happens and no one discusses it. It is like the “omerta” in La Cosa Nostra – the law of silence.
It is also true that the online sales portion of the retail market is growing fast. Interestingly, no one seems to talk about the reality of this as it relates to profit – it is far more profitable to sell a product online than it is to sell it in a brick and mortar store. In the jumble of numbers flying around in the breathless media, it is hard to see this. So, let’s wait for the final numbers, and by that I mean the earnings reports in January, to see how this whole shopping thing goes down. In the meantime, keep your eye on auto and home sales, the two places that truly show if folks are willing to put their hard-earned money into the system.
- Consultancy Knight Frank’s global house price index rose 4.6 percent over the 12 months to the end of September, taking it 4 percent higher than its previous peak in the second quarter of 2008.
The above index suggests the US is not the only place consumers are putting their money into the system. In fact, the index suggests that the folks all over the world are moving into a higher standard of living, and that is good for the global economy. Just one more piece of evidence that suggests a brighter market future.
Trade in the day; Invest in your life …
