Tuesday, July 23, 2013

Stocks & the Misery Index (excerpt)

During the Q&A session following Fed Chairman Ben Bernanke’s prepared congressional testimony on monetary policy last Wednesday, he said, “I think the market is beginning to understand our message, and the volatility has obviously moderated.” Apparently, the message is that Bernanke & Co. wants stock prices to rise and bond yields to fall. That seems to be the Fed’s “shadow” mandate. This is the one lurking behind the Fed’s official dual mandate, which according to the FOMC statements since December 12 of last year is to lower the unemployment rate to 6.5% and to boost inflation back to 2%.

The Fed’s official goal is, in effect, to lower the Misery Index--the sum of the official unemployment rate and the inflation rate (using the y/y percentage change in the core consumption deflator)--down to 8.5% and to rebalance it. It was already down to 8.6% in May, but the jobless rate is too high at 7.6% and the inflation rate is too low at 1.0%.

In the past, bull markets in stocks tended to occur when the Misery Index was falling, or at least not rising. The index is down from a cyclical peak of 11.8% during March 2010. Odds are it will remain around 8.5% through the end of next year. If so, then it suggests that the current bull market may last at least until then, if not longer.

Today's Morning Briefing: Less Miserable. (1) Bears are the bull market’s Les Misérables. (2) Tracking misery during good times and bad. (3) Falling (rising) unemployment is unambiguously good (bad) for stocks. (4) Fed’s 6.5% target for jobless rate is bullish for stocks. (5) Relationship between stocks and inflation is more ambiguous. (6) Fed’s goal of boosting inflation is also bullish for stocks. (7) Drop in Misery Index since 2009 could boost P/Es some more. (8) Earnings season is a bore so far, yet forward earnings are exciting stocks. (9) Global oil demand confirms slow pace of global growth. (10) Focus on underweight-rated S&P 500 Energy. (More for subscribers.)

No comments: