Dollars and Sense: Volatility returns to the markets

Calm before the storm. Last Monday, I said the week before had been pretty quiet, but we can now say it was a calm before another storm. In Europe, Greece and its key creditor Germany kept trying to work out a deal for Greece’s debt. But because both sides remain intractable, the deal continues to stall, spooking the global markets. The Dow lost ground four out of five days last week. We also saw a continuation of volatility in the markets. On 14 of the first 19 trading sessions in March, the Dow moved up or down more than 100 points.

Greece fire? You can’t blame all that on Greece, but the situation there is emblematic of the uncertainty all over the world. Saudi Arabia bombed Yemen last week, unnerving the global markets. Virtually every country in the Middle East is engaged in some sort of armed conflict: Iraq, Iran, Yemen, Saudi Arabia, and Syria. Lebanon now has a presidential crisis. It’s operating with no president and about 1.2 million Syrian refugees are now putting huge pressures on the country’s economy. All this was enough for traders to get jittery and cautious.

China slowdown continues. A survey of Chinese manufacturing released last week indicated a continued slowdown. Gross Domestic Product growth in China keeps getting revised downward. Current estimates are now at about 7 percent. That would be considered strong growth for a developed economy, but it’s a rate that could cause internal political unrest in China.

Safe harbor U.S.A. Given all that, the problems here at home don’t look so bad. At least, that seems to be the verdict of the rest of the world. The dollar remains very strong against the euro. It’s trading at near parity—one euro is worth only a little more than one dollar. But that confidence is about more than just the U.S. being the best house in a bad neighborhood. The U.S. economy is doing pretty well. We learned last week the cause of the 2008-2009 financial crisis, the housing market, has almost fully recovered. New-home sales in February soared 7.8 percent to a seasonally adjusted annual rate of 539,000. That comes on top of an upward revision to January’s sales rate. The new January rate is now over 500,000 as well. The last time new home sales had back-to-back months with rates at or topping 500,000 was in 2008, during the height of the housing bubble. Corporate earnings remain fairly strong, and merger and acquisition activity is up. The biggest deal last week was the merger of H.J. Heinz and Kraft Foods Group.

Structural problems remain. All that good news is almost enough to make us forget that the national debt is still rising. It’s now at $18 trillion. And with Obamacare, the share of the total GDP controlled by or directly tied to government spending continues to rise. That’s why some conservative and libertarian economists are nervous about the U.S. economy, and why some fund managers are quietly moving money into European stock markets. Despite the troubles in Europe, there’s a growing consensus that European stocks now are underpriced compared to U.S. stocks.

The week ahead. It’s a busy week for economic reports. We’ll get the Conference Board’s consumer confidence number tomorrow, auto and truck sales on Wednesday, and trade deficit numbers on Thursday. And, of course, the big number each month is the unemployment number, out on Friday. Last month, we saw a big drop in the unemployment rate, to 5.5 percent. Most analysts don’t expect another big drop, but they want to see that this economic recovery is continuing to produce jobs at the rate we’ve seen in the past year. One other thing: The markets will be closed for Good Friday.

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