Has The Transition Commenced Of Main Street Outperforming Wall Street?

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By: Kent Engelke | Capitol Securities

The selloff in the Treasury market is accelerating. In almost every dimension, January’s jobs data was strong. Both non-farm and private sector job growth was greater than expected. Growth was strong across most industries. Wages accelerated by the largest amount since 2009. This should have not been a surprise given last week’s increase in the Employment Cost Index, the greatest since 2008.

The labor participation rate (LPR), however, was unchanged matching expectations and the number of hours worked missed forecasts, but this could be the result of inclement weather.

The data all but guarantees a rate hike in March with some now postulating that there could be four increases in 2018, versus the Fed forecast of three. I think it is significant that less than 45 days ago, most thought only two increases would occur, thus suggesting a major change in outlook is unfolding.

Treasuries sold off on the data as the 10-year is now at the highest yield since January 2014, the five-year is yielding the most since 2010 and the 30-year is yielding the most since March 2017.

The selloff in the Treasury market weighed heavily on equities as the NASDAQ 100 had its steepest weekly decline since February 2006 according to Bloomberg. Earnings for the most owned technology shares generally missed heightened expectations, an event that is/was amplified by a selloff in Treasuries and the massive overvaluation of these issues. The question at hand is this just profit taking or a change in sentiment?

As noted a gazillion times, ownership of the momentum growth issues is gargantuan and if there is a change in sentiment, the market mechanics of ETF/Index investing may be tested.

Just as an aside, Amazon beat earnings and at one time its capitalization was on track to increase by $35 billion according to Reuters. The increase alone is more than the capitalization of 378 S & P 500 companies. Wow!

What will happen this week? There is little on economic calendar. Earnings, which are exceeding expectations, will remain front and center. Last week, I rhetorically asked did the market experience the old age phenomenon of “buy on rumor and sell on fact?” I think the answer is yes.

Last night, the foreign markets were down. London was down 1.40%, Paris was down 1.39% and Frankfurt was down 0.96%. China was up 0.73%, Japan was down 2.55% and Hang Sang was down 1.09%.

The Dow should open considerably lower with some suggesting Friday’s rout has more room to run, predicated by a more aggressive monetary policy than most had anticipated, the result of stronger than expected growth. The 10-year is unchanged at 2.84%, which some will then suggest will give some support to equities.

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