But it’s the worst of times in oil and credit, judging from the carnage I’m seeing on the screens in front of me.
Let’s start with the Labor Department news. The agency reported that the U.S. economy added 211,000 jobs in November, slightly above economist forecasts. October’s figure was revised higher to 298,000, while the unemployment rate held at a seven-plus-year low of 5%.
Job growth was fairly healthy by industry, with construction adding 46,000 jobs, food service adding 32,000, retail adding 31,000 and health care adding 24,000. As you might expect, mining was the weak spot at minus-11,000 while manufacturing shed 1,000 jobs.
Average hourly earnings rose a respectable, if not spectacular, 0.2% on the month. And while labor participation remained weak at 62.5%, it actually ticked higher by one-tenth of a percentage point from October.
|Jobs growth has set the Fed on the road to a rate hike, but there are still other concerns in the economy.|
Does that mean a December rate hike from the Federal Reserve is a “fait accompli”? Well, policymakers don’t gather for their two-day meeting until Dec. 15-16. But this was the biggest remaining data point before then, and it definitely gives the hawks cover to push aggressively for the first raise since June 2006.
On the other hand, things couldn’t look worse in the energy and credit markets. Crude oil prices sank as low as $39.60 a barrel today after OPEC ministers meeting in Vienna did nothing to stem the bleeding.
Not only did the cartel refuse to CUT its 30 million barrel per day output target, OPEC officials actually admitted they’re producing more like 31.5 million BPD … and suggested that will continue for the foreseeable future. So essentially, oil ministers RAISED their output goals into a market that’s already swimming in crude.
Falling energy prices are clearly putting pressure on oil-sensitive credits. But the deterioration in credit is spreading well beyond oil and gas companies, with indebted companies in other industries increasingly running into trouble, too.
The Financial Times reported today that we’ve now seen $1 trillion in U.S. corporate bond downgrades this year. Total ratings cuts are up 72% from a year earlier.
What’s more, actual defaults are running at their highest level since the tail end of the credit crisis. And yields on the lowest-rated tranches of junk bonds have surged to six-year highs.
Today, the stock market could care less. The Dow Industrials jumped by as much as 380 points after ECB President Mario Draghi essentially said “Oops” for yesterday’s selloff, and asked for a “do-over,” in a New York City speech.
|“Things couldn’t look worse in the energy and credit markets.”|
Quite frankly, this is an amazing dichotomy. Widespread carnage in credit has always been a leading indicator for economic growth and stock market performance, in my experience. And when I see central bankers so worried about a one-day, 251-point Dow selloff that they feel they have to “clarify” their comments a mere 24 hours later, I don’t grow more confident. I worry even more that they’re losing control — and they know it.
My advice continues to be “Invest cautiously.” If you’re going to be long stocks, be long higher-yielding names in less-economically sensitive sectors. One of my favorites is in the Safe Money Report, and it just hit an all-time high today.
Balance that out with a high cash level, and downside plays targeting vulnerable stocks or sectors. And definitely keep a close eye on the credit markets — if the behind-the-scenes turmoil continues to get worse, you’re going to want to dial down your stock exposure even more.
Now let me hear what you have to say. Is the labor market in good shape here? Or are the government numbers failing to adequately capture what’s happening on the ground in your neighborhood? Do figures like the FT‘s alarm you? Or should we just stop worrying about the credit and commodities market and buy a bevy of stocks? Share your thoughts below.
The complicated interactions and relationships between policy moves in Europe and the U.S., the capital markets, and the underlying economy were front and center at the website in the past 24 hours.
Reader Big M. said it would be nice to have a market driven by fundamentals, rather than repeated central bank interventions. The comments:
“Mario Draghi and Janet Yellen should not have control of the market in the first place. It’s called the free market! Maybe if government got the heck out of the way, the market would correct itself.”
But Reader Dave said it’s unlikely that they’ll back off: “Yellen and Draghi, who have been printing funny money for years, are the financial puppets and will direct the Fed and ECB to do what their masters will order. The Dow is at least 40% overvalued and zero interest rates for the last 10 years meant that retirement accounts have been making ‘zilch.'”
Reader Louis P. weighed in on the economic outlook, suggesting things aren’t as rosy as they seem: “Nothing goes up forever. This market has been going up and up, fueled by ridiculously low interest rates and the printing of money. The outstanding debt levels are spectacular (national, state, county, municipal, personal and corporate). The amount of derivatives, from what I read, far outpaces the levels that existed before the recession of 2008.
“Now, most experts talk about the risk of massive inflation ahead. But it appears to me that, in the short term, the real risk is deflation, which would cause massive unemployment and all the problems that it entails.”
Finally, Reader Frebon offered this take on what might happen if the dollar rises and corporate profits come under pressure as a result:
“Screw the multinationals. They have used the free money for stock buybacks, investments overseas, and keeping their money offshore. There has been no need for the low interest rates except to artificially increase PEs and let the market go on a tear.”
Thanks for weighing in. It’ll be interesting to see what the Fed does in a couple weeks, now that the ECB has weighed in and the jobs figures look strong enough on the surface to allow Yellen to hike rates. I believe we’re in for a period of heightened volatility no matter what, with equities catching on soon to the turmoil that’s already riling the credit markets.
Any other thoughts? Then don’t be shy. Share them here at the Money and Markets website.
Authorities continue to probe the backgrounds of the husband-and-wife attackers in the San Bernardino massacre. They reportedly had thousands of rounds of ammunition, multiple weapons, and a dozen homemade pipe bombs in their car and home — raising suspicion they may have had other attacks planned.
U.S. exports slumped 1.4% to $184.1 billion in October, the worst reading going all the way back to the same month in 2012. That drop outpaced the 0.6% decline in imports, causing the trade deficit to widen to a greater-than-expected $43.9 billion. The strong dollar and weak foreign growth are key reasons for the lackluster trade picture.
The cost of hosting the Olympic Games is out of control these days, and Brazil is buckling under the weight. The country is in the midst of its worst recession in decades, and is rapidly scaling back plans for the 2016 summer Olympics as a result.
Staffing at the games will be cut, as will spending on catering, transportation, cleaning, and other operations. One report even suggests athletes will have to pay for their own air conditioning.
What will likely happen next in the California investigation? What do you think about the disappointing trade figures? And how about the Summer Olympics — will Brazil pull off a successful event or will infrastructure and operational problems taint the 2016 games? Let me hear about it below.
Until next time,
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