Is Goldilocks Back?
06/06/2014 12:01 am EST
MoneyShow's Jim Jubak explains why he is now wondering whether, once again, we may have both a goldilocks economy and stock market.
Remember Goldilocks? Well, she's back. It's not even quite clear that she ever went away, but the consensus for a Goldilocks economy and market is certainly what's ruling Wall Street right now, so here's, for the week ahead, what you need to do is to make sure that Goldilocks is getting the right amount of porridge and the bed isn't too hard and too soft. The Goldilocks economy, if you remember, works like this:
The idea is that we're getting enough growth so that earnings and revenue will go up and therefore the market should go higher, but we're not getting so much growth that the fed will be tempted to speed up either its taper or the eventual, eventual, some time before the earth crashes into the sun (in about four billion years), eventual raising of interest rates at the fed, because the economy is too strong, okay, so as long as those two things are in balance, the market is okay and we can keep going up, so what we get is, we get a very negative, actually negative, first quarter GDP number but then that's balanced a few days later by stronger than expected manufacturing numbers, and, on June 4, stronger than expected numbers from the purchasing managers' index for the service sector. We get that backed up by a fed beige book, which is basically a, kind of, anecdotal collection from the 12 fed regions, which says, “Hey, for most fed regions, the economic growth is moderate.” We've got two regions where it's actually a little stronger. We've got one where it's going down, so again, nothing to fear there.
The thing is, going forward, we've got two things to watch. One is we need to look at the jobs numbers. As long as we're, sort of, over 200,000 new jobs created in a more or less, maybe 170 to 230, 240, I think we're still in the Goldilocks range. If we get down below that it's going to be a surprise and people will say, “Oh, that first quarter negative GDP number wasn't really all about cold weather, it might actually be a problem.” If we go much above 250, I think people are going to start to say, “well, maybe the economy is too strong.” We won't really get a number that we can count on to either confirm or deny this theory physical we get second quarter GDP reading which would really be at the beginning of July. Consensus right now is that the cost first quarter was so low we should be getting something like 3% growth annualized in the second quarter. If that's where we come in, I think we're seeing the Goldilocks economy. Just continue the story as out there in fairytale land, but this would driving the market higher as long as people like the European Central Bank and the Bank of Japan and the Bank of China, Peoples Bank of China, don't really rock the boat. All things else being equal, if Goldilocks is in control I think we'll see this market continue to move up very, very gradually even though it's near all time highs.