The June jobs report was released Friday, and, overall, it paints a softer picture of the jobs market compared to the “hot” ADP June jobs report released the day before (7/6).
Thursday, there was a sharp reaction in the bond market and the stock market. While the details in this employment report are not entirely soft, we think the overall message from this particular employment report is a softening labor market. And this means this should diminish whatever future path is ahead for Fed hikes. I don’t normally focus on one particular economic indicator, but I felt this was particularly important as interest rates spiked and the stock market swooned on Thursday of last week. This is quite different that what we experienced the first half of the year, so I took notice and felt that it was worth mentioning. Also, we sort of had a tug-o-war with wage gains as well.
The economic indicators that we have been seeing have been showing signs of slowing from the industrial standpoint, but the sticking point to the Fed has been jobs and wages. So, to get a better idea of how we could expect Powell and the company to deal with this is more important than normal. Tellingly, employment services (temp staffing) led to the declines in employment -12k and me, a sign that the labor market is softening since temp staffing is also falling. Other areas of declining jobs were a mix of building materials, couriers, warehouses, etc. Gains were in amusement parks, family services, hospitals, government, and laundry. I don’t know, it doesn’t scream a booming services sector economy.
Bottom line. We think the markets excessively wobbled Thursday on the heels of the ADP report. The headline figure from ADP was off vs. the actual jobs report. And the ADP wage story, more reliable, paints a picture of softening wage growth.
- While markets might be initially weak on this headline, we know this is because many investors are positioned cautiously. Thus, they want to point to this headline as a reason to deem the rise in markets merely a “bear market rally” and Fed will soon come out “swinging.”
- The key, in our view, is the wage gains are manufacturing not services. Services wage pressures are easing. That is key for Fed too.
- We expect good news this week on June CPI. Since I will have written this note before getting the report, I am surmising my expectation based on the succession of reports leading up to the CPI (report on consumer prices).
The reason why I am focused on the labor issues is that we are reaching a point where the fear of recession seems to be abating and the Fed has almost run out of bullets to continue its fight against inflation. As a result, the case for a protracted bear market (stock market decline) seems to be going away as well. See below, the full decline and the recovery we have experienced through last week:
The stock market decline of 27% from 4,800 to 3,490 in October of last year took 195 trading days, roughly a nine-month decline. This was a reflection of the Fed’s war on inflation, not a recessionary business cycle. And actually, the low in the markets almost coincided exactly with the highest measures of inflation. According to investor sentiment though there continues to be a lot of entrenched negativity in the minds and actions of most investors because they seem to feel that this is only a bounce in a longer-term downtrend as they expect a prolonged economic downturn to take place now and this simply is not occurring.
What is lacking in this negative opinion is that the S&P 500 has risen almost as long as it fell from a time standpoint. But to rule out the possibility (based on historical precedent) the market would have to rise the same amount of time that it fell. This would be the case if we stay up here until July 26th of this year, only a couple of weeks from now.
One other measure that is used to evaluate how truly strong the market is under the hood is the Advance / Decline line, the measure of the number of stocks rising vs. the number of stocks falling. This measure hit an all-time high last two weeks ago. Again, this probably doesn’t happen if the stock market is truly going to continue declining.
Historically, the Advance / Decline line high leads to the same thing occurring for the market index. The only exception in recent history was on August 16th of last year just before the Fed announced that they were considering a lot more interest rate hikes before they would pause, and this took investors and sent them running for the hills. This does not appear the current opinion of the Fed given that they paused their hiking cycle and seem to be pretty close to done with their ratcheting up of interest rates. We will know next week where they sit on this issue, but given the economic numbers are telegraphing a slowing of the underlying economy, it could be that the $5.5 trillion of cash should support further earnings growth and stave off a recession.
I will end with a couple of charts of seasonality. The first one is from Andrew Adams of Saut Strategy. It shows where we are on a calendar basis using the last 10 years as a guide. It looks like June and July tend to be digestion months and then later in July and in August things tend to get better. Seasonality is certainly no guarantee of performance and should only be used as a supporting indicator, but over the past ten years, at least, the stock market has enjoyed a nice little run right about now. This also coincides with the 4-year Election Indicator, the second chart I have included. I have included this chart as it takes into account many more years of market activity. This one comes compliments of Ari Wald, Chief Technician, Oppenheimer & Co.
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