There was an onslaught of data last week, which led to gains. Should more be expected with the coming earnings season?
Monday S&P 500 0.27%| NASDAQ 1.09%
ISM Manufacturing unexpectedly slipped and remains in contractionary territory. The weaker economic data would typically signal lower rates as rate cut expectations would increase. To the contrary, 10-year treasuries rose on the day. In the face of weak economic data, the start of the quarter brought optimism towards the next three months.
Tuesday S&P 500 0.62% | NASDAQ .84%
JOLTs job openings rose more than expected to 8.14M openings. For perspective, there were 6.6M unemployed as of the May report. The strong jobs data did not deter markets, though; this may be because the Federal Reserve Board (FRB) Chair, J. Powell, spoke on the day. He indicated that progress is being made towards their inflation target. This is the ‘secret sauce’ needed to justify future rate cuts.
Wednesday S&P 500 0.51% | NASDAQ 0.88%
Initial jobless claims rose for the week to 238K from 234K; the level remains elevated, albeit from all-time lows. Factory orders unexpectedly slipped into the negative on the month. Additionally, ISM Services unexpectedly slipped into contractionary territory. This is all bad news for economic production, so why did the markets rise? Interest rates fell as this data increases the likelihood that the FRB will lower rates sooner than expected. The heightened odds are now calling for a .25% cut in September and December, according to CME FedWatch.
Thursday S&P 500 -% | NASDAQ -%
Happy Independence Day!
Friday S&P 500 0.54% | NASDAQ 0.90%
Happy Jobs Friday! The unemployment rate rose to 4.1%, Nonfarm payrolls beat expectations, and participation rose to 62.6% from 62.5%, all for June. The unemployment rate went up even though we added 206K jobs??? Participation went up so, with more people in the market, the rate can go up even as jobs are added. This is a positive signal that workers are returning to the work force. The rise on equity markets, however, was on hopes that economic weakness would be enough for an FRB rate cut.
Conclusion S&P 500 1.95% | NASDAQ 3.55%
This was a busy week for economic data, especially for a holiday shortened week. We got weaker Jobs, manufacturing, Services, and Factory orders. The weakness led to stronger markets on hopes the FRB will cut rates BEFORE a recession can materialize. The coming week starts second quarter earnings. Valuations are stretched (S&P 500 P/E: 28.94) and economic production is weak, very little should be expected from this season. This could be the start of volatility that would lead into the Autumn.
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The S&P 500 shed 1.94% on the week as Omicron took center stage. Will Omicron steal Santa’s Thunder?
Monday
Markets opened the week in the red. This came as the first true negative news broke on Omicron over the weekend. There are now studies showing that second dose treatments of MRNA vaccines are not very effective on Omicron. Additionally, the UK announced their first fatality of an Omicron infected individual.
Tuesday
Inflation, inflation, inflation… Omicron, omicron, omicron… Markets dove on Tuesday as the Producer Price Index rose more than expected. The fear being that companies will have to pass those price increases through to consumers or realize weaker profits. Either scenario is bad. Omicron continues to make noise as its high transmission rate is leading to spikes in cases.
Wednesday
Market movement early was very minimal. Most investors seemed to be awaiting the results of the FRB meeting. The FRB did not disappoint. They will accelerate their taper program from $15B/month to $30B. They also signaled the potential for as many as 3 hikes in 2022. This data should prompt a negative market response, however, the markets climbed in response. The S&P 500 ended up adding 1.63% on the day. So why the gain? Investors likely view the increased action from the FRB as being in line with market expectations given current conditions. By accelerating their process, they avoid a potential misstep of being too dovish and letting inflation run away from them.
Thursday
Re-opening stocks did well on the day, but the markets as a whole fell back from the surge on Wednesday. The Nasdaq lagged the S&P 500, which is logical since it has been leading on the up days as well. The S&P 500 ended up losing 0.88% on the day. The Nasdaq dropped 2.47%. The moves on the market seem to be the long response to the FRB move yesterday. The actions of the FRB would lead towards leaner demand and softer profits on the year.
Friday
Markets tumbled on Friday while there was no major economic data on the day. The void left by economic data pushed the focus to headlines surrounding Omicron. The S&P 500 ended up falling 1.07% to close out Friday. The week saw the S&P 500 tumble 1.94%!
Conclusion
One of the fears of an overly aggressive FRB is taking action before the job market can fully mature. Participation is an important factor to the term “full” employment. In 2007, participation in the labor market was running at 66% of the population. After the 2007 recession, the rate continuously fell until 2013. The workforce contraction had much to do with the boomer generation retiring. From 2013 to 2020, the participation rate held steady at 63%. This was a combination of boomers holding off retirement and an influx of the millennial generation into the work force. During the pandemic, the rate fell to 60.8% and has since bounced back to 61.8%. So, the big question is, “Where is that other 1.2%?” If we start attacking inflation before they comeback, will we stem job growth and prevent full employment? No. They are not coming back. With every recession, you’ll find workers who decide that retirement chose them rather than the other way around. As a result, there is very little fear that the FRB’s actions are moving too quick, but rather too slow.
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