Why the Market Has Been Wrong, Maybe Very Wrong

We have some very positive signals brewing for markets, underpinned by this morning's strong jobs report. Among the most important signals, oil continues to move higher. Perhaps the BOJ read our open letter to them on Feb 12 (;"Note to ECB & BOJ: Buy Oil"). Oil bottomed the day prior and has moved almost 40% higher since. And as we discussed yesterday, some key leading indicators of economic health (copper and other industrial metals) have bottomed and have been aggressively rising.

We looked at this chart below two weeks ago, as we emphasized why everyone should be cheering for higher oil, given the critical influence it has at this point on the global economy and financial markets.

Source: Reuters, Billionaire’s Portfolio

You can see in the white box in the chart, the continuation of the this lockstep relationship of oil and stocks. Better oil price outlook, lower risk of a global meltdown, higher stocks.

We've talked about the broad belief that markets are always right, and that price is always telling us something that we've yet to discover. The opposite is true. Markets are often wrong. And sometimes very wrong.

That's been clearly reflected in the U.S. interest rate market, which is the market proxy for where the Fed is headed, and whether or not their actions are (will be) helping or hurting.

On that note, consider that the Fed raised rates for the first time in almost 10 years back in December. And they told us they expected to hike another four times this year. The market immediately dismissed it, pricing in a chance for three hikes. Just weeks later, the market had all but completely ruled out the chances of ANY hikes this year, even while a voting Fed member sat in front of a TV camera and told us again that even a March hike was still on the table.

The yield on the U.S. 10 year note is now 35 basis points higher than it was just three weeks ago! That's a market that arguably had it wrong, and maybe very wrong. When markets are leaning too aggressively in one direction, it creates a situation where things can swing from one extreme to another. The Fed would like to see nothing more than stability return to markets (especially stocks). It's fair to expect when they do, they will carry on with their plan of hikes.

So, will that stability transpire? It's highly likely that we see more central bank action coming in the next two weeks from Europe and Japan to underpin global sentiment and stability, and that could be the catalyst, and the moment, that turns the tide for the global economy toward a stronger recovery. With that, by the end of the year, we may find, looking back, that the market that was very, very wrong on the bet about the Fed's rate path.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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