Closing Thoughts for the Week

Investors remain overoptimistic about the current state of both the markets and economic conditions. That will leave them vulnerable to a sudden shift to real risk-off conditions that could be coming soon. With the S&P 500 trading at 19 times forward earnings, there’s not a whole lot of room for error. We could be nearing the point where risk-off begins recoupling more firmly with the traditional safety assets.

The S&P 500 was relatively flat on the week and continues to hold up comparatively well, but several other asset classes are signaling weakness. Friday’s non-farm payrolls report came in around what was expected, but the markets treated it as another potentially hawkish piece of data. Nothing that I saw this week makes me inclined to believe that conditions for an April event have really decreased at all.

With gold up sharply and lumber prices down on the quarter, this is a very solid indicator that risk-off behavior is brewing. Treasuries are much more free to continue behaving like a safe haven asset and a counter-risk to equity volatility. But there are some curious signs building. The housing market could be a catalyst for an April decline, which the lumber/gold ratio is already signaling.