The headline employment numbers looked pretty good for both the US and Canadian economies for December:
US non-farm payrolls jumped 292,000, well above the expected 200,000. The gain was led by professional and business services (+73,000) which is considered a leading component for future hiring. As well, there were upward revisions of 50,000 to previous months. Unemployment remained at 5.0% as the labour force participation rate moved off of its lows to 62.6% (from 62.5%).
Uncertainty comes with the lack of inflation seen in wage growth which was unchanged in December (expected to be higher by .2%)
So as we try to determine how this will influence future US Federal Reserve interest rate policy (which has a dual mandate to facilitate maximum employment and price stability), it raises the question as to when will inflation (which remains well below the Fed's and other central bank targets) begin to turn higher?
The US Federal Reserve governors have suggested that inflation will eventually return to target levels (although there is little sign of this at the moment) and they also see the likelihood of 4 interest rate increases through 2016.
Other central banks want to keep their monetary policies stimulative, the US Fed wants to reduce stimulus.
We financial market participants have coined the term for this as "Diverging Monetary Policies" (see my blog from Wednesday of this week for the Themes for 2016 http://www.highrockcapital.ca/scotts-blog.html).
As the US Fed raises interest rates, they will drain liquidity from the monetary system. This will only add to the potential for greater volatility in asset prices (and 2016 has only just begun!).
So a stronger economy is not necessarily an antidote for the equity markets. You don't buy an economy, you buy assets.
If asset prices are under duress (volatility) then you are less likely to be comfortable buying those assets. Investors may postpone asset purchases in this case and buying support may not contain market prices until they get to more attractive and more comfortable levels. If owners of assets perceive that prices in the future are likely to go lower, then they may be more inclined to sell in the near term.
Simple economics: more sellers than buyers means prices are heading lower.
Volatility creates uncertainty and uncertainty creates volatility.
Volatility is on the rise and until there is more certainty and comfort, volatility will continue.
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist