Market Signals ‘Yellow’ to Start the New Year

by Bryan Perry | January 7, 2014 2:19 pm

Wall Street is officially back to work this week, with the first days of the trading year having given back some gains on ultra-light volume.

Understand, however, that tens of billions of dollars in pension monies will be flowing into equities as long as the tide is out for the bond market. This transformational shift in portfolio allocation will be like a tsunami that will feed the stock market and result in fresh highs for the major averages over the next three months.

At the same time, I predict that the first quarter of 2014 will show a tempering of the strong fourth-quarter growth rate for GDP as manufacturers, wholesalers and retailers work off inventories that were ramped up significantly in October and November.

Monday morning’s release of the latest ISM services index reading, which came in at 53.0 versus the 54.6 consensus forecast, is the first sign of evidence that the torrid year-end spending binge will be tempered.

Bond traders are cueing off this initial read on the economy, buying Treasuries across the board, and the yield on the 10-year is trading down, which in turn is bringing about fresh investor interest in high-yield assets.

This week’s confirmation of incoming Fed Chair Janet Yellen fortifies the notion that the Fed’s zero-interest-rate mandate will continue until the unemployment rate gets down towards 6%; if this is adhered to, it will pave the way for a continuation of the low-interest-rate environment that will fuel the rotation into income sectors that generate 6%-15% yields.

This week will be subject to a lot of employment data and will provide an early glimpse of the current labor trends. Market pundits are expecting pretty solid results, with non-farm payrolls for December expected to come in around 200,000, some of that figure being seasonally related to retail hiring for the holiday shopping period. The strong finish to the 2013 trading year tells me that a sizeable portion of good news yet to be reported has already been priced into the market, and therefore some consolidation before earnings season kicks off is well-warranted and constructive.

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