Yesterday’s decline in weekly jobless claims – the fourth decline in a row – was all the news required to keep hope alive and send stocks higher. However, while the jobless data was encouraging, it was still not what can be considered a signal of a solid ‘recovery’. On the contrary, if a company like GM lays off 10,000 workers one month few would argue that things are truly ‘improving’ if GM lays off only 1,000 in the following month (have weekly jobless claims been ‘improving’ since topping around 500K in late 2001?). Yet for some strange reason so long as weekly jobless claims decline the alternative reality created by forward thinkers holds; for stock prices it is not where the economy has been, but where the economy may be going.
In the context of historically low interest rates, historically rich stock prices, and unbridled investor/consumer hope, any stat showing any hint of ‘improvement’ is a leading indicator. Much like the ‘period of calm’ theory put forward on Tuesday – “one has to wonder whether or not a period of calm in the financial markets could rattle gold back down to the $320 an ounce area” – this explicit focus by investors to over interpret every economic report spawns a similar theory. Call it the theory of constructing alternative realities, or Mr. Market’s Myopical Syndrome. Whatever the name, and like a boxer’s black eye healing, so long as things look better than yesterday it must to time to get back into equity ring.
Buried in yesterday’s data was the fact that continuing claims rose by 43,000 to 3.741 million during the week ended June 14, bringing the 4-week continuing claims average to 3.7245 million (or the highest level since the early 1980s). Needless to say, alternative realities are best supported by looking at some of, not all of the facts.
I seriously doubt that stocks can continue to rally. However, unless easily beatable second quarter earnings disappoint, mutual fund managers suddenly grow a conscious, or doves looking for hints of ‘improvement’ begin looking at all of the facts, the case for an immediate market collapse is simply not present. Next week is important in that it marks quarters end and some key reports will be released (ISM, Jobs report). Moreover, the following week (after July 4 weekend) is noteworthy because second quarter earnings will begin to arrive. Suffice it to say, by mid-July the case for a collapse could be more compelling.
In sum, Greenspan is no more ‘serious’ about reigniting growth today than he was when he first cut interest rates, fewer layoffs do not suggest that a hiring spree is near, and we all know boxers with blurry vision should not jump back into the ring. Nevertheless, the dollar strengthened following this weeks Fed cut, gold weakened, and ‘sidelined’ money has stepped up its hunt for yield. The reality is that since the U.S. economy and stock markets face many challenges in the coming months that investor’s should be careful. Yet only in an ideal world will investor’s see caution as the likened alternative.
Speaking of caution, after a run-up in share prices Todd and I do not believe that any company remaining on the Wish List is extra attractive at the moment. And although we are continuing to update our equity investment opinions ahead of next weeks quarterly report, we would caution investors ahead of time that significant changes to the Wish List may be coming in the weeks and months ahead.
June 28, 2003