Pop sociologist and bestselling author Malcolm Gladwell coined the phrase "tipping point," referring to that instant when momentum for change becomes unstoppable. With the publication of the surprisingly positive US labor market report for November, on 4 December, we just might have reached such a moment.
A first interpretation might consider the report a business-cycle tipping point. The cheering labor data at least hints at a definitive end to the US recession, although cautious economists would need to see confirmation of such a judgment in December’s data.
However, the real tipping point wasn’t the labor market report at all, but the market’s reaction to it. One of the most striking features of the financial crisis was the high correlation among all kinds of assets. With the exception of government bonds and cash, supposedly unrelated performers behaved like synchronized swimmers as they headed for the bottom in 2008. In 2009 this high correlation continued, especially after March, as every investment, including even government bonds, delivered decent to outstanding returns.
This unusual collective behavior did not reflect portfolio shifts. Rather, it was surely due to the immense amount of liquidity that central banks worldwide injected into the economy to counter the credit crunch. This money flowed into almost every asset class, lifting the prices for bonds, commodities and equities. The only real loser this year has been the US dollar, which, given the negligible US interest rates, has taken over from the Japanese yen as the darling funding currency for carry trades.
But after US labor market report, we think the market is finally differentiating again, for the first time since March: equities increased in sync with a strengthening US dollar, while both bonds and gold lost some ground. This is, historically, a normal market reaction when participants start to believe in a recovery.
While it is too early for an all-clear signal, both the US labor statistics for November and the market’s reaction can be seen as the first signs since the crisis hit that the economy is truly mending. This would obviously be a solid basis for 2010.
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