Last week, I asserted that the market’s health hinged upon a “Goldilocks” result in the monthly payrolls report that was released this morning. The market is certainly viewing the increase of 4.8 million non-farm payrolls as the proper result – beating estimates, but not by so much that it squelches talk of fiscal stimulus. It is particularly impressive that the market is able to rise sharply even after a week of solid gains – most major indices are up about 1.5% at this writing.
On the surface, this is exactly what the market would have wanted. The unemployment rate fell to 11.1% from 13.3%, smaller than the 12.5% survey. The misclassification of 5.8 million jobs that we saw in the May report was reduced to about 2.8 million in June, which would increase the unemployment rate by about 1%. The labor force participation rate rose more than expected, and while average hourly wage numbers missed expectations, they were within reason. This is yet another economic release that outpaced economists’ surveys. Economists had a more measured view of a rebound than equity markets.
Market Nihilism
Recent economic releases were far from perfect, though. For starters, the cutoff date of the payrolls survey was June 12th – before the Covid-19 outbreaks in states like California, Texas, Florida and Arizona caused those and other states to pause or roll back their reopening. Weekly jobless numbers that were also released this morning showed an unexpected jump to 1.427 million versus a 1.35 million expectation. Those numbers are current through June 27th, which does include the beginning of the rollbacks. It will be fascinating to see how the weekly numbers change as the virus response evolves, and how expectations develop for the next monthly release on August 7th.
Where does this leave us now? Traders learn to trust their gut instincts, and my gut feels similar to how it did when I wrote this piece, calling myself a “Market Nihilist”. Looking back at that article, I displayed serious misgivings about how equity markets seemed to ignore all sorts of warning signs as they inexorably rose. In hindsight, I wish I had shorted the market aggressively at that point, rather than simply moving into cash. I outlined the litany of negatives that the market was facing, which all came into sharp focus less than two weeks later. The problem with fighting a relentless market is that one’s timing must be perfect, and perfection is nearly impossible.
The month of July has its share of potential pitfalls. Tax payments that were deferred in April will be due on July 15th. People who expect refunds file early. People who expect to pay file at the latest possible moment. One has to expect that there are many profits reaped in 2019, and that there are investors who will need to liquidate some holdings to pay those taxes. It is believed that one of the triggers for the “Sell in May” effect is that money comes out of the market in mid-April. That didn’t occur so far this year, but could have an influence this month.
Takeaway
Also, earnings season begins later this month. Many companies have withdrawn guidance for this year, which should make analyst expectations more difficult. Will equity analysts prove as conservative with corporate earnings as economists have been with economic results? One would think that the extreme valuations in a wide range of stocks would make it difficult for them to outpace the lofty expectations that appear to be priced in, but resilient markets can find the silver lining in any cloud.
Finally, will the Federal Reserve continue to support the market in the manner that many investors perceive? As we have noted, the Fed’s balance sheet has stagnated in recent weeks, and has actually dipped slightly. The Fed did not push up their expected balance sheet release like the Bureau of Labor Statistics, so we will need to wait to see if that trend persisted this week, let alone into the coming weeks.
There is much for investors to ponder over the coming long weekend. In the meantime, many are simply enjoying the ride. Goldilocks did not disappoint.
Photo Credit: tdlucas5000 via Flickr Creative Commons
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