Now three days in a row stocks are up in America, with the S&P 500 showing a modest uptick that is humble compared to last week’s strong rallies. Still, the market is showing not only resilience but the ability to clock in modest gains, so far defying the seasonal expectations and the patterns of 2012 and 2011.
Institutional investors, at least judging by inflows, remain on the whole optimistic. Hedge funds and institutional investors are not selling off en masse, at least according to their 13F filings. While some reallocations are occurring due to fundamental changes in prices and earnings, money is not being put on the sidelines–while money that has been outside of the market is slow to return, due to fears of a calamity or downturn hitting the market.
But 2013 certainly feels different, so what chance is there that there will be a dip and entry point opportunity for those out-of equity dollars? Let’s take a look at some macroeconomic indicators and their recent trends to see.
Employment
Since 2008’s collapse, a core concern for investors has been the shaky labor market in the developed world, which has been hit year after year amidst company downsizing, declining wages, and an overall weakening of labor’s economic clout. This has meant less money from consumers to spend on stuff, and less revenue for companies. The lower revenues, in turn, have forced employers to find ways to lower expenses and raise earnings to keep investors happy, and in many cases
this has meant a hit to employees’ wages or job satisfaction.
This vicious cycle has not gone away, but signs are there that it is less vicious than it has been. Last Friday, the BLS announced that unemployed fell to 7.5%, and many analysts saw this as a turning point that could mean less and less unemployment in the future.
One worry is that job openings in March 2013 were down slightly (3.8 million compared to 3.9 million), possibly a sign that the employment market is not recovering faster. More worryingly, year-over-year numbers were down. In March 2013, there were less job openings and hires than in 2012.
The market has not yet responded negatively to this, but it may if more bad news about the employment market comes out in the coming weeks.
Japan
One of the unsung heroes of 2013 is also one of the most unsuspected: Japan’s aggressive monetary policy was squarely aimed at providing liquidity and fighting deflation at home. In short, the Bank of Japan began buying assets at a tremendous rate, and the Yen weakened relative to the US Dollar. At the beginning of the year the exchange rate was around 86; now it’s at 98 and fighting the 100 resistance level.
This flood of new yen into the market has sought a home, and while it has helped Japanese stocks see a tremendous rally (the Nikkei 225 is up over 37% YTD, a rally unimaginable for nearly a decade), it is also helping U.S. stocks too, as yen-based investors seek to diversify into American markets.
If Japan tightens the tap on the flow of yen, even just a little, it could cause equities to falter, but there is no sign of that just yet. Still, it’s an important systemic issue that investors should look at closely.
Europe
Then there’s Europe, a complex and troubled continent that caused scandal and fear when Cyprus accountholders were told they faced a haircut. Still, EU economic commissioner Olli Rehn has pointed to America as a model for Europe, with the focus on improving employment and thus rebuilding the economy from the bottom up as a strategy going forward.
While European leaders have previously ignored employment, it is suddenly becoming a main focus. If they succeed in improving the job prospects of Europeans, it could result in more consumer spending, and thus better revenue for U.S. companies that sell in Europe. Of which there are many.
For now, the signs in Europe are optimistic, leading many investors to stay in the game instead of triggering that seasonal sell-off that was a main talking point just a few weeks ago.
Timing Tomorrow’s Trades
So how should investors act tomorrow? It all depends on the results of the weekly jobless claims, which will be announced tomorrow an hour before the opening bell in New York. Analysts are projecting a 3.3% weekly increase, a modest and by no means alarming rise. If the claims meet that number or fall below, you could find a big rally tomorrow. A higher number could erase much of this week’s gains.
Traders will have plenty of time to plan trading strategies for the day, and there are many proprietary formulas out there for how to make a short-term capital gain both on good and bad news. For more longer-term investors, a surprise decrease in jobless claims could raise conviction of a strengthening U.S. economy and result in a fourth consecutive day of gains, with the potential for a new record high in both the S&P 500 and the Dow Jones Industrial indexes.