While I am not sure who coined the phrase or idea initially, but the expression “Bizzaro World” has been used many times to describe a situation where everything happens in the exact inverse as to what would be expected in the “normal world”, if there truly is such a thing. In Bizzaro World something round is considered square, up is down and something positive is actually negative. It would seem that the equity markets have been existing in just such a universe at this time as positive economic data appears to distress the market while negative provides a boost.
For example, a week ago today the Bureau of Labors statistics released the February jobs numbers and reported that for the month the U.S. economy generated 295,000 new jobs and the unemployment figure dipped down .2% to 5.5%, the lowest level reached post-recession and the lowest mark reported since May of 2008. Of the new jobs added, 59,000 were in food services and drinking establishments, which are often not the highest paying positions, but professional and business services grew by 51,000, construction added 29,000, health care 24,000, transportation and warehousing 19,000, retail 32,000 and manufacturing 8,000. We actually lost 9,000 jobs in mining. The workweek was unchanged but hourly earnings were up 3 cents and even the civilian labor force participation rate improved albeit by a very slight 1/10th of a percent. All in all, this would appear to be good news and suggest that the economy continues to expand and strengthen, which in turns is a positive signal for the markets, right? Not in Bizzaro World.
To provide a counter balance to this good news, this past Thursday the commerce department released the retail sales figures for February and it would appear that consumers are still holding onto the purse strings quite tightly as sales fell .6% in February, marking the third month in a row of lower sales versus economist expectations of a slight increase. Considering that it is estimated that consumer spending generates around 70% of our economic growth, this would not appear to be particularly positive news, but here in Bizzaro World, equity markets rallied after the release.
There is actually a little rhyme and reason to the recent action in the equity markets as participants are once again trying to outguess how quickly the Federal Reserve may raise interest rates. The rationale is simple; if the economy is showing signs of accelerating, the Fed will likely raise rates sooner and of course if growth is stagnating, they may continue to stall. We may not have to wait too long to find out as the next Fed meeting is here on the 17th and 18th of this month. James Bullard who is the chairman of the St. Louis Fed has already been expressing the opinion that we may have waited too long but Mr. Bullard in not in a voting position this year. Chairman Janet Yellen has often used the word “patient” over the past year when voicing the sentiment of the FOMC and you can be assured that Fed and market watchers will be closely scrutinizing each word from the meeting to see if “patience” is excluded from the vocabulary. I do not believe there is anyone that is not expecting the Fed to begin increasing rates in 2015, but will it be in the second, third or even fourth quarter before that occurs? In light of the way the market has reacted to news this week, one might ask if the announcement of a rate hike would be positive or negative for markets. I guess we will need to be “patient” in order to find out.