Watching the stock market on a daily basis is a good way to go insane. If you doubt this, all you have to do is read the various explanations for the daily gyrations – which rarely make much sense. Nevermind them. Since the start of 2016 the market’s been in a serious funk, which is to say it’s had a major urge to get down.
The official explanation is “China”. Something about China, at least. We’ve never bought that here at Barataria, focusing instead on the positive news that surrounds us every day. No, we’re not joking. There is indeed positive news and the market reflects this – sort of, at least.
Like good funk, the story of the stock market today comes with a backbeat and a solid bass line. It’s all about how the vagaries of international finance flow through the news and the market with a beat that so infectious ev’rbody has to dance.
The disturbance that roils the world markets from China is fascinating. It’s not that anything has actually changed in China, but the perception of the country certainly has. Where it once was a land that any serious business had to invest in to cash in on the 8% annual growth, it’s become a place to flee away from because they have a paltry 7% annual growth. The real difference is tiny but the perception is huge.
Slower growth means that growth isn’t going to continue forever. The Yuan, aka Renminbi (RMB) is not going to increase in value and not everyone can get rich at once. In the last month I’ve seen at least four references to a “Chinese Wall” of money coming our way, something we’ve talked about in Barataria for a solid year.
What’s crazy about all this is that there is almost nothing in the way of bad news for the US. It is true that as the US Dollar increases in value our exports become more expensive and our manufacturing loses out. We’re losing the Currency War, without a doubt. But we’re not losing it as badly as many fear, as shown in this chart:
The biggest rise finished a year ago, and hit a level much lower than it was between the official recessions and far lower than it was in 2000. Note also that it’s turning down recently, which is to say that it may be over-bought.
The main reason? A predicted rise in interest rates. That makes US Dollars, the currency that makes the world go ‘round (rather literally) more expensive.
This is where everything gets a funky backbeat. Fed Chair Yellen has become much more cautious about a rate rise, stressing that their keeping an eye on things and removing the word “balance” from her statement. It’s calmed the markets, for now at least, but they hardly needed calming. The S&P500 never closed much below the 1858 low of last August, meaning there is a solid floor to this market.
That’s the bass line that keeps the market solid.
In the middle of all this, consumer spending went up in January, signaling that everything really is goin’ along well at least here in the US. The benchmark 10yr Treasury Bill has hit an interest rate of 1.75%, down from 2.32% in December, meaning there is indeed more money available for consumers as the job market plugs away nicely.
Where is this all going? The short answer is sideways from here. There won’t be any significant rise in interest rates and everything will indeed settle down. Give it another quarter, as we predicted at the start of the year. The market is gettin’ down because the market wants to get down, and there’s no better reason than that.
What will happen to China? Who really cares? Once it all settles out the serious money will realize that the rest of the world is investing in the US and we should, too. It’s a matter of confidence – and the need to get out on the floor and dance. There might be a good reason to be shy right now, but this is a beat that will be infectious in a few months.
As long as the Fed keeps the party going, there will be a party. This one will be more fun than most, is all.