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Triple Witching Hour Proves Benign 

Kristina Hooper 

The Upshot 


Markets yawned their way past two big reports and one key deadline last week, but investors are still fleeing stock funds overall. It’s a strange brew that signals continued volatility ahead, says US Investment Strategist Kristina Hooper.

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Kristina Hooper, US investment strategist and head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.

Even though last week’s January jobs report was disappointing and didn’t show strength in the labor-market recovery, the markets celebrated, with the Dow and the S&P 500 both posting gains for the week.

Why this head-scratcher? It was likely interpreted as a “Goldilocks” report—not bad enough to slow tapering and not good enough to speed it up—and investors divined that the Fed will continue gradually winding down its asset purchases. And although tapering was always expected to be distasteful to stock-market investors, it clearly appears more palatable when the yield on the 10-year Treasury remains low—which it did most of last week at under 2.7%.

This is the Great Tapering Paradox: Tapering is creating turmoil in emerging markets, which is creating fear in the US. That, in turn, is resulting in a flight to safety within the bond market, which is placing pressure on yields.

We expect more twists and turns in the stock market in the coming weeks, and consumer spending should slow further.”

Scary Days in D.C.?

Something else happened last Friday that was perhaps more momentous: The US blew past the official debt-ceiling deadline that Congress set last fall, when it cobbled together a temporary solution.

With this missed deadline, the Treasury must now take “extraordinary measures” to enable the US to meet its obligations on time, according to US Treasury Secretary Jack Lew. Further, Lew has underscored that the February 27 deadline for resolving the debt-ceiling issue is a hard-and-fast date, thanks to all the expenditures that occur this time of year.

While some may be counting on a resolution before the end of February, there is little time for the two political parties to agree on a compromise. Republicans are reportedly working on a proposal but, given that Congress is in recess part of this month, the window for negotiating may be closing.

Ultimately, we’re likely to see a resolution by February’s end, but don’t be surprised if we see some bumps along the way.

Reading the Revolving-Credit Tea Leaves

One more important event occurred last Friday: the release of December’s consumer-credit number, which showed a significant increase in revolving credit—$5 billion more, to be exact. It was the largest jump since May 2013 and the third-largest increase of the five-year-old economic recovery.

Big Increase in Revolving Debt Raises Questions - Chart

This rise could be interpreted positively as a sign that consumers have become more optimistic and are increasing their purchases. But it could also be an omen that consumers can’t make ends meet and are actually borrowing to pay for day-to-day expenses.

Unfortunately, it might be the latter, given the significant flaws in the labor market, the lack of wage increases and lackluster consumer sentiment.

A Roiling Market

Looking ahead, we expect more twists and turns in the stock market in the coming weeks, and consumer spending could slow further for three reasons:
Consumer sentiment is likely to remain wanting in the near term, with lower-income consumers maintaining their negative views because they haven’t participated meaningfully in this recovery, and higher-income consumers feeling less positive because of the stock-market drop.
The expiration of emergency-unemployment insurance is already calculated to be affecting well over 1 million people.
The debt-ceiling debate may cause more jitters.

The Economic Recovery Continues—Just Not Smoothly

Still, volatility in stocks, especially downside volatility, doesn’t mean the economic recovery is ending—it’s just uneven and probably taking a breather.

Keep in mind that the ISM Non-Manufacturing Index, which represents a much larger part of the economy than ISM Manufacturing, posted a strong number last week, including a nice improvement in employment.

What’s more, earnings season has proved to be better than expected, with a significant increase over recent quarters in the percentage of companies whose revenues have met or beaten expectations.

So what’s an investor to do, especially those who have been fleeing stocks and stock funds over the past few weeks?

Unfortunately, there are no magic potions to make the present feel better or crystal balls to make the future more clear. Investors just need good old-fashioned patience and an opportunistic spirit to look for occasions to add to equity exposure on the twists and turns that move the stock market lower.

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The Standard & Poor’s 500 Composite Index (S&P 500) is an unmanaged index that is generally representative of the U.S. stock market.

Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. It is not possible to invest directly in an index.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 actively traded blue chip stocks, primarily industrials, but including financials and other service-oriented companies. The components, which change from time to time, represent between 15% and 20% of the market value of NYSE stocks.

The Institute of Supply Management (ISM) Non-Manufacturing Index measures growth in various industries, including agriculture, mining, construction, transportation, communications, wholesale trade and retail trade. A reading above 50 indicates an expansion. To produce the index, the ISM surveys 400 manufacturing firms on employment, production, new orders, supplier deliveries, and inventories.

Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.

A Word About Risk
: Equities have tended to be volatile, involve risk to principal and, unlike bonds, do not offer a fixed rate of return. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets.
The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.



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