Post Jobs Report Hangover

Most stock market indexes sank at the open this morning. At the moment, the Dow is down 240 points, and the SPX is down .3%. Consumer discretionary, tech and communications sectors are holding onto modest gains but every other sector is in the red. Emerging markets stock funds are up nicely on better than expected economic news out of China, but developed foreign stock funds are flat. Commodities fell back across the board (gold -1.8%, oil -1.6%, copper -1.2%) as the US dollar strengthened. The bond market is also uniformly lower. The 10-year US Treasury Note yield climbed back to 1.37%.

Last Friday’s Employment Situation Report was much weaker than expected (payrolls +235,000 during August vs. +720,000 expected). In a research note to clients, Bank of America said, “The weaker employment activity is likely both a demand and supply story — companies paused hiring in the face of weaker demand and uncertainty about the future while workers withdrew due to health concerns.” Indeed, the number of those who said they couldn’t work for Covid-related reasons rose by about 400,000 during the month to a total of 5.6 million. So that’s the bad news. The good news is that all of the other numbers included in the report were pretty strong. The Bureau of Labor Statistics revised previously reported June & July payroll additions by over 130,000. Wages continue to increase, now rising at a 4.3% year-over-year clip. And the under-employment rate, which includes discouraged workers—those who want to work full-time but are currently settling for part-time positions—sank to 8.9% in August from 9.6% in the prior month. CNBC concludes that Covid-19 is still producing “a lot of noise in the jobs data.”

On one hand, traders are nervous about a growth slow-down, which is why the jobs report is under a microscope. And there are a few signs that the hyper phase of recovery from Covid has passed. For example, Citigroup’s Economic Surprise Index, which measures whether economic reports are coming in better or worse than expected, has fallen back to May 2020 levels. On the other hand, signs of slower growth will likely encourage the Fed to delay or slow the planned removal of stimulus. And that may be why the stock market didn’t sell off when the jobs report was announced. We know that sometimes bad news is good news. But it seems the bond market didn’t agree. Over the past month bond traders have been increasingly convinced that the Fed will soon begin slowing its monthly bond-buying, which should allow bond yields to drift higher. And we have seen the 10-year US Treasury Note yield drift upward since then. It certainly ticked up in the aftermath of the jobs report, suggesting bond traders believe the report wasn’t soft enough to discourage Fed tapering. All of this reading of the tea leaves gets rather tedious, especially because traders are reassessing with each day’s news cycle. So I’ll simplify the running debate this way: will economic growth be strong enough to begin removing stimulus, or will growth slow enough to prevent the removal of stimulus?

I’ve mentioned Covid, jobs, Fed stimulus and economic growth, but of course other variables like the Biden Administration’s tax hike & stimulus plans could impact stock and bond markets over the next couple of months. CNBC points out today that the S&P 500 has rallied about 20% this year without even a 5% pullback. That is not normal, which is why some Wall Street strategists are predicting a correction in the near-term. And it is true that the months of August, September and October tend to be seasonally weak months for the stock market. A correction would go a long way toward relieving some valuation pressure on the market, and would begin to price-in some of the risks listed above. But investors will likely buy the dip, whenever it comes. After all, it’s hard to ignore the fact that we are in the middle of a synchronized global economic recovery. Corporate earnings are trending better than expected. And stocks still look more attractive than bonds, cash or most commodities.