MorningWord 8/2/13: The July jobs data is out and to some the fact that the economy added only 162k jobs, 26k below the consensus estimates and revised the June number down by 7k, while the unemployment rate actually ticked down to 7.4%, the lowest reading since December 2008. As I write this the S&P futures are dead unchanged, which is fairly impressive given that pundits will suggest that this probably leans more towards on schedule Taper than later despite the miss. I continue to hear more market participants suggest that the Taper is “IN” U.S. Equities at current levels, which very well may be the case when you look at the price action yesterday in the SPX, breaking out of a recent consolidation to close at a new high, on a day that Bonds got trounced, with the TLT closing near a 2 year low.
Enis had a great write up on the relative performance of stocks vs bonds in his MacroWrap this morning (here), and while the relationship may be reaching extremes, many market participants seem to be getting more and more entrenched in their long equity positioning at a time when we may be heading into an unprecedented period of uncertainty as it pertains to the FOMC and the world handicaps just who will be the new Chairman in January charged with the unwind they are handed.
Aside from some fairly decent central banker speak this week (Draghi included), there was some better than expected macro data on the manufacturing front from the likes of Germany, Italy, France and even China, as those PMI’s showed expansion. U.S. Q2 GDP came in slightly better than most economists expected, while earnings for the most part continued to be perceived with a glass half full mentality.
Despite things feeling pretty good with the markets at all time highs, and the SPX up nearly 20% on the year, my sense is that the low levels of risk being priced into the market at current levels could be reason to take pause as sentiment has apparently shifted from extreme caution in almost every asset class in May/June to what is apparently near euphoria about owning stocks. To put this complacency in some context, the at the money straddle in the SPY in Sept (if you were to buy the 170 call and the 170 put with the etf around 170 ) is only pricing in a 3.5% move in either direction.which is only slight above the average monthly return for 2013, a year that has seen 3 monthly gains of almost 5%. From a quantitative option’s trader perspective (not mine) this could amount to a great sale as realized volatility is plummeting to the lows of 2013, but for those who own risk assets, a little protection at these levels could certainly help you sleep at night as you try to hold onto longs.