“The lack of money is the root of all evil.”—Mark Twain
Friday’s market action was more schizophrenic than usual, as traders and investors couldn’t decide if the unexpectedly upbeat unemployment report was enough to offset growing concerns about the new earnings season, slated to begin next week.
The Labor Department data showing a 7.8% unemployment rate was unexpected, catching numerous economists by surprise. The sub 8% number quickly dominated the news cycle and extended all the way into Twitterland, where former GE head honcho Jack Welsh insisted that the lower-than-anticipated numbers could only be the result of a government conspiracy.
But what was equally surprising was that the numbers, which would seem to indicate at least a small movement towards economic recovery, failed to impress traders and investors. The markets ended up, but not as high as one would have predicted under the circumstances.
So what gives?
First, the new earnings season is fast approaching, beginning next week with Alcoa (AA). There is a good chance that the global economic problems, in particular those within both China and the eurozone, could end up impacting Wall Street’s upcoming quarter of company reports. A number of eurozone countries have been battling recessionary economies, which will have a direct effect on a number of corporate bottom lines. China still has positive a GDP, but in relationship to recent years, its economy is in decline.
The two regions comprise the top U.S. trading partners, and it is not a question of if they will show up as a cause of red ink for the multinational corporations about to report earnings, but rather a question of the extent to which they will impact the multinational corporations’ bottom line.
In addition, the current round of eurozone uncertainty is focused on Spain, where that country’s Prime Minister Mariano Rajoy is doing his best rendition of Hamlet, voicing indecisiveness at to the course of action to come. The bottom line is that Spain needs a bailout, and the ongoing negotiations between them and the ECB need to get resolved soon, or investor patience may wane and 10-year bond yields may return to unsustainable levels.
The variables of the equity market seem to be increasing as the year plays out to conclusion. The reluctance to hop on board the happy train of apparent good economic news may be a sign of the uncertainty that is rising in the market.
What the Periscope Sees
The ability of investors to buy the asset class of volatility at what could be considered a discounted rate could serve as a possible remedy to the uncertainty on Wall Street. Consider adding a VIX derivative, such as VXX, (S&P 500 VIX Short-Term Futures ETN) to your portfolio as a hedge against poor earnings reports or a sharp drop in the market due to any eurozone surprises. It’s worth noting that the VIX, while off its lows for the year, is still at a level that indicates relatively low volatility in the market, which may or not be an accurate indication of where things will head next.
ETF Periscope
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
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