In this weekend update, we look at the equities bull run and the U.S. dollar.
U.S. equities climbed again this week, gaining more than 3% in most major indexes as well as the NASDAQ reaching record highs. The fascinating aspect of the bullish move in equities is that we are seeing the move amidst multiple causes for concern. Some concerns including the trade wars, North Korea, rising yields, and the resignation of Gary Cohn. Any one of these could have been justification for a sell-off and even a large sell-off. Instead of any sell-off, prices remained relatively strong, saw minor pullbacks that were quickly overcome. When the nonfarm payroll jobs data reports came out, equity strength continued as if there were no concerns at all. Volatility, as measured by the VIX fell to 6 week lows and crossed below 13 on Friday.
The nonfarm payroll data was the highest monthly job growth since December of 2014 and the second highest behind June of 2010. The problem with the data is that average hourly earnings are not growing as fast as one might hope for true economic growth. Wage growth is underperforming inflation by less than half. Despite the average hourly earnings, equity strength and job growth could be confirming that we are seeing growth that should sustain us for the entire 2018. We have discussed economic cycles and the idea that we could be 3 years into a bull run if we look at 2015 as the market correction but the U.S. dollar has not shown stability or demand that we would like to see if the economy continues to strengthen.
The weakness of the U.S. dollar when the Federal Reserve is planning on raising rates creates a dilemma. Rising rates stalls if not stops inflation. Inflation is usually attached to low rates, borrowing, and expansion. If inflation is halted and growth slows while the U.S. dollar strengthens, it will become harder to export, more expensive to borrow and the economic cycle could be reversed. Some analysts are looking at the rally in equities with the many causes of concern as not economic growth and stability but as an indication of speculation and irrational exuberance (to borrow a phrase). We may be enlarging the bubble in equities. Commodities have already shown some weakness and the U.S. dollar is poised for a new bullish cycle. Consumer Price Index next week and the FOMC statement the following week are going to be significant indicators for both U.S. equities and the U.S. dollar.