MacroWrap: Threading the Needle

by Dan September 6, 2013 9:30 am • Commentary

The fairly clear takeaway from  Q2 earnings and Q3 guidance over the last 2 months has been that the pace of the recovery remains anemic.  While there has been fits and starts of encouraging economic data, the 2 most important pillars of our recovery, Jobs and Housing, show few signs that we are on the verge of an increased pace of economic growth.

This morning the Aug jobs data came in light to expectations at 169,000 jobs added, bringing the unemployment rate down to 7.3%, the lowest level since December 2008.  For weeks pundits and market participants alike have claimed that the “SepTaper”  was gonna come down to this, hot number and Fed signals that they buy less bonds at their Sept 17/18th FOMC meeting.  So now what, the data is mixed at best, but the unemployment rate inches down, which could see a sub 7% rate by early 2014, a level which Bernanke signaled in May/June would be a pivot point for ending QE.

Bond investors didn’t care to wait as the Fed laid out their exit strategy in the spring, they just started selling bonds hand over fist which resulted in a fairly seismic shift in rates, the 10 year treasury yield touched 3% yesterday, nearly doubling from the May lows.

So what’s it mean for stocks?  There are many that believe, and history shows that yields and stocks can rise together as higher yields speak to a strengthening economy.  My quick take is that the 2.5% GDP growth seen in Q2, the very low levels of inflation, the recent softness in retail sales/housing data, coupled with U.S. corporations who remain hellbent on cutting costs (and still cutting jobs) and would rather pay dividends and buy back their stock than reinvest their capital speaks to a shaky stage of the recovery.  With U.S. equities 3% from all time highs made last month, I do not see a favorable risk reward to adding new longs in the U.S., the Fed is trying to thread a needle when the outgoing chairman faces some very difficult near term decisions that will define his legacy, the President seems focused on choosing a new chairman that the markets will not like, and our government is about to enter what is shaping up to be its annual fiscal fiasco.

As I wrote in today’s MorningWord, I would make rather take a shot on relative value overseas, or with U.S. multinationals exposed to the reflation of global growth as you will likely get a heck of lot more bang for your buck trying to get the last little bit out of what has worked for the last few years.