Week of Complacency

Another week has gone by, and once again, the S&P500 didn’t do much of anything. Although it inched up 0.6% by week’s end, it traded in an extremely narrow range every day. Volume was light, and volatility retreated back down near the lows set in 2013. This has the feel of a ‘wait and see’ atmosphere, even in the face of some ugly economic news. Nothing much changed in the equity markets last week.

Technically, the slight bounce pushed the S&P back toward over-bought levels on the daily, weekly and monthly resolutions. This has been the case for quite a bit of the last half of 2013, and as of the beginning of 2014, it’s still the case. Bullishness is also off the charts, as has also been the case for a while. And valuations are nearing 25 year highs, when the stock market was blowing a tech bubble in the late 1990’s.

Economic data flow was light, but mostly negative. While factory orders slightly beat expectations, the ISM Services Index missed badly. Consumer credit growth also disappointed. But the big story, and number, of the week was the jobs report. In a word, it was ugly. Instead of growing by 200,000 jobs as expected, payrolls inched up by only 74,000. This is a huge miss. Headline unemployment fell, but this happened only because hundreds of thousands of folks found the labor market so discouraging that they simply stopped looking, and by doing so, they no longer count as being unemployed, according to the Bureau of Labor Statistics. Piling on to the bad news, the average work week fell and average hourly earnings also disappointed. But once again, this really ugly part of this story is the labor force participation rate, which at 62.8%, fell to the lowest level in 35 years.

So what did the US stock markets do after this shockingly bad news? One would think that they would have sold off, at least a bit. But that’s not what happened. Instead, the S&P actually closed up on the day of the bad payrolls report (Friday). And as mentioned already, the S&P gained 0.6% on the week. This is clearly evidence that complacency has taken over the US equity markets.

Interestingly, and more logically, US Treasuries rallied, as we expected the might a few weeks ago. This was partly because they were very oversold (and offered a comparably attractive return) and partly because investors were reacting to the reality that the US economy is more troubled than the public believed, or wanted to believe.

So while some markets are starting to accept the reality that the US economy is weak, has been weak, and is likely to continue being weak, the US equity markets are still closing their eyes and ears to this reality. Stock markets are extremely complacent.

Let’s see how long this complacency lasts.

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