Dollars and Sense: At quarter's end, the markets lack conviction

A new quarter. In the past week, we turned over a new month and a new quarter. Though we still have plenty of problems in the economy, it’s fair to say we have more good news than bad. Stock market performance was mixed. The Dow was down slightly for the quarter, but the S&P 500 and the NASDAQ both rose. In fact, they rose for the ninth consecutive quarter.

Employment picture brightens. We saw a steady decline in the unemployment rate and continued job creation in the first quarter. The markets were closed on Friday, but we did get a new monthly unemployment report. The unemployment rate was unchanged at 5.5 percent. Given the declines in the rate of the past few months, that was not unexpected. The bad news in the report is that the economy created only 126,000 new jobs, significantly less than expected, and the markets reacted negatively on Monday. But for the quarter and for the past 12 months, job creation has been strong.

Mergers and acquisitions. Merger and acquisition activity has also picked up significantly, and that’s usually a sign of renewed vigor in the economy. But a lot of mergers have been industry specific, especially in healthcare. UnitedHealth Group said it would buy drug benefits manager Catamaran for $12.8 billion. Shares of both stocks rose on the news, and since United is a Dow component, it caused a bit of a pop in that index. Drugmaker Teva Pharmaceutical agreed to buy Auspex Pharmaceuticals. And finally, Horizon Pharma is buying Hyperion Therapeutics. Those mergers are motivated at least in part by Obamacare and the need to create economies of scale and a bigger corporate footprint in order to negotiate more effectively with an ever-growing government. In other words, some of these mergers are the direct result of government manipulation of the economy, and there could be—almost certainly will be—unintended consequences.

Not all positive. Although the news is mostly positive, every coin has two sides. For example, a strong dollar, a sign of U.S. strength in the world, means U.S exports are more expensive overseas, slowing demand. The Commerce Department said the nation’s trade deficit plummeted 16.9 percent to $35.4 billion in February. Both imports and exports sank, driven by a global economic slowdown and that strong dollar.

Dollar mania. The strong dollar has also led to some interesting unintended consequences. One of them is that China is not able to buy as much recycled paper from America. China makes boxes from U.S. newsprint and fill them with manufactured goods that come back to the United States or get shipped to the rest of the world. But a slowdown in Chinese manufacturing and a strong dollar means that a lot of newspapers are ending up in U.S. landfills. Low oil prices mean plastic bags aren’t being recycled either. The cost of the petroleum used in plastic is now lower than the cost of recycling. These are just a couple of examples of how delicately interrelated our economy has become.

The week ahead. Believe it or not, we’re back into corporate earnings season. And a word I’ve been hearing more of in the past week or two is “conviction.” The markets are trading at near record highs, and even though we’ve seen volatility, it’s been within predictable technical trading ranges. So traders are just reacting to the news. If it’s good, they buy that day. If it’s bad, they sell. Traders don’t have a strong conviction about market direction that would motivate patience on bad news days. Earnings reports will help us see whether the near-record prices are supported by underlying company fundamentals. So look for a strong reaction to earnings reports over the next few weeks—one way or the other.

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