The week overall was very eventful, which gave us a plethora of topics of discussion from which to choose this week. We have everything from the fallout over Bill Gross leaving PIMCO under a cloud to the strong jobs report to the disconnect in market behavior regarding this week’s jobs report and last week’s jobs report.
I’ll start with a brief comment on the Bill Gross situation. There has been more than ample media coverage of his departure from PIMCO, the company he founded. Most of the coverage has covered his contentious relationship with the board and other management, as well as his recent poor performance, but overall, the coverage has been rather kind to Mr. Gross. In fact, few reports discuss the reasons behind these two things: Mr. Gross bet heavily against US Treasuries in 2011 and it cost his investors dearly and led to the withdrawal of billions of dollars from his flagship Total Return Fund. Mr. Gross made his situation worse by lambasting the Federal Reserve for holding down rates, and warned of soaring inflation and debasement of the dollar once QE2 ended. Neither of these things happened, and his predictions and management decisions were in direct conflict with his own chief economist. Now every asset manager has been wrong and subsequently made investment decisions that did not work out, but the problem as I see it with Mr. Gross is that rather than reassessing his position, he effectively doubled down and became very public about blaming others, which showed he was either unwilling or unable to understand the macroeconomic situation of the time. As noted, very little of the media coverage has dealt with this aspect of his leaving PIMCO.
As for the markets, they soared today because of an extremely strong jobs report, however, last week the market took off because of an extremely weak jobs report. What’s the logic here? It’s the markets, so there isn’t much logic, and this is a perfect encapsulation of why it’s difficult to “time” markets.
It would seem that this week’s addition of 248,000 jobs, and the unemployment rate dipping below 6% for the first time in quite a while were reasons for celebration in the markets, and bolster the contention that last week’s dismal report was anomalous and is likely to be revised upwards. We continue to see the US economy improve while Europe flirts with deflation and a return to recession. This has led to the dollar strengthening by 7.3% since June, which itself has likely contributed to the rise in US markets and slowing of European markets. This leads us to the question of to what degree the US dollar is correlated to global equity markets.
There is a general belief that there is a notable correlation between dollar movements and equity market movements. Thanks to an analysis by our friends at RBC Wealth Management and data provided by S&P Capital IQ, we can see that since 1986 there has been little to no correlation between dollar strength/weakness and equity market performance. Furthermore, what we learn from an in-depth review of this data is that while making investment decisions based on broad market index correlation to the dollar is unwise, dollar strength/weakness does have a strong impact on individual global companies, the very companies in which we invest. One key to proper stock selection in this environment is choosing stocks that earn in dollars, but book expenses in weaker currencies. We have been in the process of realigning portfolios to make use of this, and will continue to do so over the next few months as we see dollar strength continuing for the next 12-18 months at least.
Next week we will be watching the release of the FOMC minutes on Wednesday, and Thursday’s Jobless Claims report.