Economic Analysis: Lack of Follow-through is Not Good for Equities

We have noticed something with equities markets over the last few months. Especially after the release of news. That is the lack of follow-through or conviction after market news. The Standard and Poor’s 500 (S&P 500) is the global benchmark for equities (stocks). This market finally broke the key 2,000 level last week. The S&P 500 has also seen a return of two hundred percent since hitting a low of 666 points, March 2009, at the height of the global recession.

Extra liquidity in the equity markets have kept them quite supported. This has been coming from central bank’s quantitative easing (QE) which has been pumping cash into equity markets like the S&P500 and the Dow Jones Industrial Average (DJIA). The QE programs were designed to stimulate borrowing and growth. After more than five years of equity markets rising at, what seems like, an unstoppable pace, valuations have become extremely stretched.

The next big piece of market news, one that should be a big catalyst for traders, is today non-farm payroll (NFP). We are expecting to see job growth of 225,000 new jobs in the world’s largest economy. We are also expecting the unemployment rate to drop to 6.1 percent. In reality, we could possibly see and even better number of around 240-250,000 new jobs.

We have seen job growth of over 200,000 for the past six months. Another print of 200k and higher would signal that the U.S. economy is strengthening nicely and that the labor market is on a strong road to recovery. This number could push the market higher today. Along with the string of good economic data coming out of the U.S. over the last several weeks, should be a strong signal to the bulls to push equities higher.

Even with a weak number, bulls might be incline to shrug it off and still come out buying. In the short term, equity markets could see more record highs, but with valuations stretched so thin, and with the looming end of cash being pumped into the markets, one must ask two questions: Where is the top and when will the bottom fall out?