The bull market needs some fuel and that will come once the U.S. jobs picture improves, incomes start to rise and consumer spending revives, strategists say.
"History tells us that a peak in the U.S. unemployment rate has the potential to sustain the equity rally - globally," said Pierre Lapointe, a global macro strategist with Brockhouse Cooper. "We have calculated that every time the unemployment rate peaks after a business cycle, the post-recession global rally gets a second wind."
Basically, investors bet on a recovery. "Investors realize if the jobs market gets better that means consumers will start spending again and that means profits down the road," Mr. Lapointe said.
What is the market looking for now?
After three solid months of increased spending, economists are looking for consumers to take a breather and investors may need to be patient. Personal spending data scheduled for release Friday is forecast to have increased 0.3 per cent during April, compared with a lofty 0.6 per cent rise in March, according to a survey of economists by Bloomberg.
On the plus side, personal income is expected to have crept higher rising 0.4 per cent in April, compared with 0.3 per cent in March.
Another positive for U.S. consumers is that they have had no reason to be worried about rising prices. The personal consumption expenditures inflation data, known as the PCE deflator, measure price changes for a broad range of goods and services, excluding food and energy. The deflator also due out Friday is forecast to have declined to a 47-year low of 1.1 per cent in April, well below the U.S. Federal Reserve Board's long-run forecast of 1.7 per cent to 2 per cent, according to BMO Nesbitt Burns Inc.
"The sharp turnaround in the labour market in recent months suggests that incomes will soon start to rise more significantly," said Paul Dales, the U.S. economist for Capital Economics Ltd. "This will allow households to raise their savings rate without too much of a slowdown in consumption growth," he said.
How will the market react?
So far stock markets have not reflected that bullish scenario. Investors have been preoccupied with sovereign risks concerns, which has driven stock markets lower. Last week the VIX, a measure of equity volatility, soared to 45.79 but this week it plunged to about 30.
"Only on five occasions in the past 25 years has the VIX reached such heights," said Carmine Grigoli, chief investment strategist with Mizuho Securities USA Inc. Such elevated readings suggest emotional selling and on average the stock market has jumped 26 per cent in the following year.
And Brockhouse Cooper's Mr. Lapointe said that on average six months after U.S. unemployment levels peak (in October, 2009) global markets increased 9.4 per cent, compared with the recent 1.1-per-cent decline. "One year after the unemployment rate peak, global equities were up 17 per cent on average," he said.