Tower Private Advisors
- Surprising response to strong payrolls report
- Solid payrolls report
Capital Markets Recap
Since at least May the market narrative has been something like, bad news is good; good news is bad. The reason for that has been, to date, that bad news means the Fed won’t slow down its monthly bond purchases; good news about the economy would increase the odds that the Fed would reduce its purchases; i.e. the so-called taper. So when I saw the news headline flash that Nonfarm Payrolls in the month of November had jumped by 203,000, well above the 185,000 expectation, I fully expected futures to have slumped; instead they rocketed higher, as shown below. In fact, they did slump, but only briefly.
Next to your local library, blogs are your best source of information on all matters financial, so I turned there, only to find consternation over the action. So the only thing I can come up with is short covering. That’s what it’s called when short sellers rush to close out short positions, which benefit when prices decline. So, maybe after five days of declines–i.e. profits for short sellers–they decided to cover their short bets. But maybe that’s just the easy way out, sorta like the television pretty people who chalk up declines not accompanied with bad news to so-called profit taking. Sounds pretty lame.
So I called up the smart guys at Strategas. They think it’s a realization by the market that the economy is strong enough to withstand some tapering. I dunno know…we’ve been hearing positive spins on tapering from various quarters, and it hasn’t stuck. Why now?
There are a lot of very smart folks who believe the Federal Reserve has propped up stock prices with its various monetary shenanigans–including me. I don’t think the muted action to one payrolls report is going to change that so quickly. There is still a huge risk of a market disruption when the Fed does begin to taper, and an eventual tapering process is not yet priced into the market; it’ll take a lot of volatility before that is reflected in security prices.
As alluded to above, and as repeated here often, only one report mattered this week, the monthly Nonfarm Payrolls report. It showed an Unemployment Rate that had fallen to 7.0% from 7.3%. What’s more, for the first time in a while, the Labor Force grew by 455,000, which means that more folks felt they could find a job and started looking. The Household Survey showed an increase in employment of 818,000, well above the estimate of 735,000.
Here is a look at month changes in Nonfarm Payrolls beginning in 1993. We’re running at a pace akin to what we saw in the early ’00s, but considerably below the heady pace of the 90s.
Rather than wade through a busy week of economic statistics that pale in comparison to payrolls report, here is a look at Citigroup’s Economic Surprise index. This takes a whole slew of indicators and compares the actual releases of the figures and compares that to economists’ estimates. As the line rises closer to the top, economists are increasingly being trumped by the data–it’s better than they expect; as it falls, the data is not as good as economists expect. This week saw a very sharp rise. That doesn’t mean the economy is on a tear. Instead, it suggests that economists will raise their estimates for the economy, and that’s likely to filter through to their firm’s equity analysts, who will proceed to raise their earnings forecasts.
Oh, there was one other release, Q3 Gross Domestic Product, which rose sharply, but it was pooh-poohed by economists and Wall Street, as it rose on the strength of inventory restocking. That’s sort of second class economic growth, as it could be the result of poor inventory management, not necessarily stronger demand. Indeed, Personal Consumption was revised down, from 1.5% to 1.4%
A couple of significant reports are due out. Job Opening and Labor Turnover Survey (JOLTS) on Tuesday, along with NFIB Small Business Optimism. Initial Jobless Claims on Thursday, and the week is wrapped up with the release of Producer Price Inflation.
Graig P. Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors