The S&P 500 finished the fourth month in a row better than it started. The late-month spike in volatility has relaxed and several of the major indices are nearing or breaking record highs. The Nasdaq still has a ways to go to recapture the March-2000 highs of over 5,000, and Apple is weighing heavily on it. The markets could go a bit higher over the next couple of months, but the next critical deadline in budget & spending talks in Washington D.C. roughly coincides with the time when a lot of institutional traders "sell in May and go away." This could send markets lower in a hurry.
The one thing that's missing from the rally is volume. Past bull runs were accompanied by stable or increasing volume. This latest run up is occurring under the exact-opposite conditions. The market is moving higher while volume is declining. That is unsustainable, and explains why the millions, if not trillions of dollars reportedly "on the sidelines" are staying there. It is also evidence that a good percentage of the buying demand is due to short covering, which is also short-lived.
The run up has been nice, but the contrarian in me is starting to brace for a correction. The "smart" money doesn't chase gains in record-high markets. Most deep-value stocks are long gone and except for a few unpredictable moves higher following earnings reports, the potential for further gains in stocks is decreasing. Now is when we start looking a little harder for income plays that aren't demanding crazy premiums and defensive stocks that pay good dividends and tend not to fall precipitously on pullbacks.
The February jobs report came in stronger than analysts expected. The economy created 230,000 jobs; safely above their estimates of 160,000. That number includes a loss of 10,000 government jobs, mostly at the city and state level. The unemployment rate fell to 7.7% from 7.9%, but that was primarily due to a reduction in the labor force of 130,000. Following big upward revisions last months, December's numbers were revised up again by 23,000 and January was revised lower by 38,000, resulting in 15,000 fewer jobs created than previously estimated.
The pesky, U-6 unemployment rate, including those who've given up looking for work and those forced to work part-time who would rather be working full time is at 14.3%. 22.6 million Americans remain out of work and almost 5 million of them have been out of work for more than six months. The percentage of people who have a job, or are looking for one declined a tick to 63.5%, matching a 32-year low. More than 89 million Americans are considered no longer in the workforce.
Monthly employment numbers are far less indicative of a healthy economy than the averages. The average job growth for the first two months of 2013 was 169,000. The comparable number for 2012 was 291,000. We'll be looking for substantial revisions again next month. Given that February is the shortest month with the most holidays and fewest working days makes it more susceptible to seasonal adjustments. A huge increase in construction jobs during the coldest month of the year is also likely to be revised.
March's number will be much more-interesting as it will be the first post-sequester employment snapshot. If we don't see huge job losses, we'll be told the economy is stronger than we thought. If we do, the Fed will have all the excuses it needs to continue its easy-money policy a little while longer, and the chicken-little, sequestration doom-and-gloomers will say I told you so.
Inflation remains in check and that means a couple of things. First, it is going to remain difficult to earn anything on cash or to find low-risk investments that produce high yields. Second, gold and other precious-metal prices will remain under pressure as long as rates stay low. Of course, we're talking about inflation as measured by the government. Try telling anyone who has watched gas prices climb 30% in the past few weeks there's no inflation.
I'm not holding my breath expecting either side to get it right any time soon. In a Capitol Hill press conference on March 7th, former house speaker Nancy Pelosi tried to explain that tax cuts are government spending, and that any reduction in government spending must also include a reduction in tax cuts. While I'd like to say this level of economic illiteracy is surprising, it's just more of the same. Only someone whose believes that everything belongs to the government to begin with could reach this conclusion.
Don't get me wrong. I'm all for the gradual phase out of most tax deductions, except maybe charitable contributions. But, because we're stuck with a government that operates in two-year cycles, during which time most of the time and energy is wasted on blaming the opposition for prior failures, we can't even consider the possibility of something like a ten-year phase out of deductions resulting in a simpler and fairer system.
I could go on for pages about how ridiculous I think both sides are being when it comes to these budget, spending, tax and sequestration issues, but I'll try to keep it brief. Nobody wants their benefits cut, and no elected official wants to be responsible for cuts because it pretty much guarantees they'll be voted out at the next election or removed even sooner.
Thomas Sowell describes what's going on about as well as anyone. He asked former students to imagine a hypothetical government agency that has only two functions: (1) building statues of Benedict Arnold and (2) providing life-saving medications to children. If this agency's budget were cut, what would it do?
The answer, of course, is that it would cut back on the medications for children. Why? Because that would be the thing most likely to get those cuts restored. If they cut back on building statues of Benedict Arnold, people might ask why they were building statues of Benedict Arnold in the first place. Public alarm is what can get budget cuts restored, and the more, the better.
Sowell admits his example was deliberately extreme as an illustration, but the same general pattern can be seen in local, state and national government responses to budget cuts. We've heard all the dramatic warnings about how the sequester cuts would destroy Meals on Wheels for the elderly, Head Start, meat inspections, air traffic controllers, and police, fire, and 911 operators.
The administration and government agencies are following this script very well. Why cut White-House tours and none of the hundreds of other, less-visible programs? Why release thousands of illegal aliens from prisons? One reason only: to create public alarm. As long as we're asking, if the 2% being cut is so important why wouldn't our leaders jump at the chance to make reasonable and targeted cuts from the other 98%? All spending reductions are bad for bureaucrats.
Only in government is a reduction in an expected increase a cut. Under these "draconian" cuts that amount to less than 3 cents on the dollar, the federal government will still spend more this year than it did last year. In 2007, the government was 40 percent smaller than it is today. Were poor people sleeping under bridges? Were the elderly starving? Were planes grounded? Was food unsafe to eat? Are the majority of Americans really this gullible? Looking at the latest polls, one can only assume so.
The government would like you to believe that every dime of their spending is wise, benevolent and essential. The problem is we'll never know because government programs are rarely evaluated for effectiveness, efficiency or necessity. According to the Government Accountability Office, there are 50 different government-run programs for the homeless across eight agencies, 23 programs for housing aid in four agencies, 26 programs for food and nutrition aid among six agencies, 27 programs on teen pregnancy, 130 programs for at-risk youth, 10 agencies to promote exports and 342 separate programs for economic development.
The federal government also runs 47 different job-training programs. The GAO found that only 5 of those 47 programs had done any kind of detailed impact studies, and that among those, the effects of participation were not consistent, and that the demonstrated positive influence tended to be small, inconclusive, or restricted to short-term impact. If government programs, like stimulus spending are most-effective in creating near-term results, why do nearly all government programs expand and grow with increased budgets year after year until they become unaccountable, bureaucratic disasters, models of inefficiency and magnets for fraud and abuse?
Entitlements eat up approximately two-thirds of federal spending and are excluded from sequestration. Got that? Two thirds of entitlement spending is completely unaffected by the sequestration and will see every bit of its expected increase...no cuts whatsoever, by anyone's definition.
I know we're only talking about $ billions which are easily lost in the noise of debt and deficits in the $ trillions, but we have to start somewhere, and phasing in reforms and cuts over several years so the impact can be absorbed and people can plan and prepare is the right way to do it. It also allows you to reverse course if you find the "fix" is making things worse.
Well, so much for keeping it brief. We'll do this again in early April. Don't hesitate to call or e-mail if you have questions.
