Dollars and Sense: Volatile week hints at economic jitters

Economic jitters continue. The Dow fell more than 200 points last Friday. And we’ve seen the market continue to trend generally downward this week, while volatility has gone up. There’s little doubt that we’ve reached a critical point in the four-year-long stock market rally. The rally has been driven by artificially low interest rates, which made bonds unattractive relative to stocks. But a Treasury bond auction last week saw an unexpected uptick in rates. With a bit of a spike in interest rates last week, some investors are asking: Is now the time to re-allocate out of stocks and into bonds? That decision was a driving factor in the decline last Friday, and that question, plus a spate of conflicting month-end economic reports, drove the markets this week.

Jobs, jobs, jobs. The monthly jobs report from the Labor Department on Friday was chief among them, though this jobs report, when it finally arrived, was almost anticlimactic. First of all, payroll processor ADP announced on Wednesday that job creation had been less than expected, and that sent the markets down. Then on Thursday, we saw weekly unemployment numbers that were slightly better than expected, and that sent the markets up. So by the time we got the report on Friday that the economy had created a better than expected 175,000 jobs, but unemployment had ticked back up to 7.6 percent, the markets were, as my mother used to say, almost “too pooped to pop.”

Rally out of gas? Does that mean this four-year-long stock rally is running out of gas? Regular readers of this column know I don’t like predicting the future. But I will repeat what I said earlier: The data seem to suggest this market has reached an inflection point. We saw a report this week from the Institute for Supply Management that showed contracting manufacturing for the first time since last fall. On Tuesday, the volatility index—which is considered to be a gauge of fear in the market—jumped 4.42 percent in a single day. It rose 12.5 percent in the past week and 27 percent in the last month. Something is definitely up. But it may take several weeks, and a look backward, to know exactly what it was.

So what to look for? The good news is that plenty of news in the coming week will likely force the question. We’ll see a treasury bond auction Monday, and on Friday we’ll get the monthly producer price index, plus lots of reports in between. On Thursday, we get a report I’m especially interested in: the 30-year TIPS announcement. Now, lots of people have never heard of this, but it’s an inflation adjusted treasury bond, and the spread between the regular 30-year bond and the 30-year TIPS is often thought of as a proxy for the long-term inflation rate. Lately, that spread has been increasing. Last week I looked and it was 2.21 percent. If that spread increases, it could signal an uptick in inflation, and suddenly this obscure report could end up moving the markets significantly.