Sometimes what you see is what you get. This was not the case with the August salary report.
At first glance, the number was a huge disappointment. The US economy created just 235,000 jobs last month, well below the consensus of 750,000 and even below the lowest estimate of 400,000. The immediate story was obvious: growth is slowing, growth is slowing. The job market is stagnating and the recovery is just not happening fast enough.
But dig a little deeper, and all was not as it seemed. The 0.6% month-over-month increase in average hourly earnings indicated continued inflation, while upward revisions to employment figures in June and July, which rose to 976, respectively. 000 and 1.1 million, suggest the numbers may not have been so low. as they looked. The fact that hardly any jobs were created in the leisure and hospitality industry indicated that the Covid-19 Delta variant may have been a bit of a problem.
At the end of the day, that didn’t seem to mean much, as the
closed 1.52 points lower on the day, ending the week at 4,535. Still, the jobs report was presented either as a sign of problems ahead or as a signal that there is no nothing to worry about. The numbers could be a reason, in other words, for the Fed to be cautious about starting tapering or a signal that the central bank should start cutting its bond purchases as soon as possible. “People will find data to back up their story,” says Keith McCullough of Hedgeye.
But what story? These days, it may seem impossible to choose, which is, I guess, why Morgan Stanley strategist Mike Wilson laid out two opposing views in a memo released last week. On the one hand, the Fed looks at the incoming data, particularly on inflation and the potential for spikes in Delta variant cases, and decides it is time to taper off. Wilson suspects that Jerome Powell & Co. could start the process by winter, and when he does, interest rates would rise, stock valuations would drop, and the market would drop 10%, even though financial stocks could. benefit from it.
On the other hand, a slowdown in growth could also be on the horizon due to the drop in consumer confidence and the fact that such demand has been pulled forward. And if growth surprises too much on the downside, it could also lead to a definitive market correction, leading to outperformance in health care and consumer staples stocks.
“Ultimately this fall, we still expect our mid-cycle transition to end with a correction of more than 10% from the S&P 500, but a tale of fire or ice will determine leadership,” writes Wilson. “As such, our recommendation is a defensive grade bar with financials to participate in and protect in both scenarios, which appear equally likely to occur.”
Wilson’s Fire and Ice scenarios end similarly, with a long overdue fix. That a correction must have happened now is another tale brought up by investors marveling at the continued market gains. The S&P 500 rose 2.9% in August, its seventh consecutive monthly advance, just the 15th time this has happened since 1950. It has also run throughout the year without falling at least 5%. which has only happened twice since 1980, in 1995. and 2017 – notes Keith Lerner, chief market strategist for Truist Advisory Services.
It is certainly rare, and there are many reasons why the market should go down. It’s been going up for too long. It’s too expensive. The Fed distorts its performance.
Nicholas Colas of DataTrek offered 10 such justifications, ranging from market seasonality and geopolitical events to a Covid breakout so severe that further lockdowns are needed. He even cites factors that would benefit us in the real world, but not necessarily the market, such as an earlier end to the pandemic. “Today’s list is not a ‘sell it all’ warning,” Colas writes. “It’s more of a (hopefully) comprehensive overview of what could go wrong.”
Just because it can go wrong doesn’t mean it will. This is especially true due to the strange dynamics of the market at play.
JP Morgan strategist Nikolaos Panigirtzoglou attributes much of the rally to retail investors, buying stocks at every trough. But it pushed stocks to levels that made professional investors, such as pension funds, uncomfortable. Rather than taking on stocks, they bought bonds to maintain their properly weighted asset allocation. And when the time comes, they’ll start selling their stocks, and possibly their bonds, too, Panigirtzoglou adds.
Yet despite equity allocations for non-bank investors now approaching the post-Lehman Brothers high, he does not yet expect a correction. “[In] in the absence of a significant slowdown in retail flows to equities, the risk of a correction in equities remains low, ”writes Panigirtzoglou. “It remains to be seen whether the next Fed policy change will change the attitude of retail investors towards equities. “
Do not mistake yourself. No market goes up forever, and this one needs to take a breather. In that space at the end of 2020, I wondered if the stock market was a bubble and concluded it wasn’t, despite leaking special acquisition vehicles, hot initial public offerings, and parabolic movements in many searingly growing actions. Now I am not so sure. But there is a problem with trying to predict a fix: not getting one. The S&P 500 experienced four declines of 3% or more in 2021, but resumed its advance each time. Selling at the bottom of each would have meant leaving big gains on the table. Rather than trying to perfectly time the release, I would listen to the market, which shows no tendency to correct at this time.
Remember, you can tell the market what to do. He just doesn’t have to listen.
Write to Ben Levisohn at [email protected]