Election Surprises and Stock Markets

Last week (What Would Spook Markets?), I focused on recent research conducted by economists Eric Zitzewitz and Justin Wolfers, which concluded that a Trump victory would “reduce the value of the S&P 500, the UK, and Asian stock markets by 10-15 percent...and would significantly increase expected future stock market volatility.” There may be some proof to this thesis: As Trump’s numbers have improved, stocks have responded in kind by dropping: the S&P 500 has dropped for nine consecutive sessions, for a total of a 3.1 percent slide. The numbers still favor Clinton, but this has been a strange year, so it is worth looking back to other presidential shockers. 68 years ago, Republican Thomas Dewey was thought to be the favorite and according to analysts at Capital Economics, “the polls caused the stock market to rally in the weeks leading up to the election. However, the shock re-election of incumbent President Harry Truman caused the S&P 500 to fall by more than 10 percent over the next two weeks.”

Finally, given Trump’s vow to fight the results, if the race is close, it is instructive to consider how a contested election result might play out for investors. In 2000, when the country had to wait for the Supreme Court to weigh in on a recount, there was a clear negative market reaction: stocks dropped by almost 5 percent during the week after the election and remained volatile during the 36-day period after polling day.

October Jobs Report:The labor market recovery continued in October, as the economy created 161,000 jobs and the unemployment rate edged down to 4.9 percent, mostly in line with expectations. Beyond the headlines, there were three positive data points in the report: the August and September results were revised higher, bringing the average monthly gain for 2016 to 181,000 jobs; average hourly earnings rose, pushing up the annual increase by 2.8 percent, the fastest monthly growth since June 2009 and an especially impressive number, considering that inflation is running at about 2 percent; and the broader measure of unemployment, which includes those who have stopped looking for jobs and those working part-time for economic reasons fell to 9.5 percent, the lowest level since April 2008. (Note: Although a lot of Americans are working part time, almost all of the 11 million jobs added since the recession officially ended in mid-2009 have been full-time positions.)

At the Federal Reserve policy meeting last week, the central bankers noted that “the case for an increase in the federal funds rate has continued to strengthen, but decided, for the time being, to wait for some further evidence of continued progress toward its objectives.” Consider the October jobs report as further evidence that will help bolster the Fed’s case for a quarter-point interest rate increase at the December 13-14 meeting. Traders are betting on it…according to the futures markets, there’s a 75 percent chance of that outcome.

MARKETS:

• DJIA: 17,188 down 1.5% on week, up 2.7% YTD
• S&P 500: 2085, down 1.9% on week, up 2% YTD (9 consecutive losing sessions, longest losing streak since Dec 1980)
• NASDAQ: 5046, down 2.8% on week, up 0.8% YTD
• Russell 2000: 1163, down 2% on week, up 2.4% YTD
• 10-Year Treasury yield: 1.77% (from 1.85% week ago)
• British Pound/USD: 1.2518 (from 1.2186 week ago)
• December Crude: $44.17, down 9.5% on week
• December Gold: $1,306.90, up 2.2% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.22 (from $2.22 wk ago, $2.21 a year ago)

THE WEEK AHEAD:

Mon 11/7:

3:00 Consumer Credit

Tues 11/8: Election Day

CVS, News Corp

6:00 NFIB small-business optimism index

10:00 Job Openings and Labor Market Turnover (JOLTS)

Weds 11/9:

Viacom, Wendy’s

Thursday 11/10:

Kohl’s, Macy’s, Walt Disney

Friday 11/11: Veterans Day: Bond Markets and Banks CLOSED, Stock markets OPEN

10:00 Consumer Sentiment

Jobs Report Stinks: No Fed Rate Hike in June

The May jobs report was a stinker. The economy added just 38,000 jobs, the fewest since September 2010. Even adding back the 37,000 jobs lost in the telecom sector, which was primarily due to the recent Verizon strike, May was a dismal month for hiring. Adding to the downbeat news, revisions of March and April reduced jobs by 59,000, pushing down average monthly job creation for 2016 to 150,000, well behind the more than 200,000 thousand gains seen over the past few years. Although the year-over-year change in May was an impressive 2.39 million jobs, the recent trend is worrisome: Over the past 3 months, job gains have averaged 116,000 per month. Additionally, the unemployment rate fell to 4.7 percent, the lowest level since November 2007, but that was due to more people dropping out of the workforce, not because a slew of wannabe employees got jobs. Unfortunately, the weakness was widespread. Manufacturing lost 10,000 jobs, construction shed 15,000 jobs and temporary help fell by 21,000.

Despite recent comments by Fed officials extolling the improvement in the economy, the weakness in this report likely means that the central bank will not raise rates when it meets in a week and a half. It also calls into question the health of the overall recovery in the second quarter, which is estimated to accelerate by about 2.1 - 2.3 percent on an annualized basis.

In the first quarter, we could attribute the paltry 0.8 percent GDP to plunging oil prices, a stronger U.S. dollar and weakness in China. But those factors have largely turned around: crude has soared from $27 per barrel to nearly $50; the dollar has stabilized after rising sharply against other major currencies in late 2014 and early 2015; and although Chinese growth remains on the worry list, there has been a simmering down of tensions.

The economic expansion celebrates its seventh birthday this month, making it the fourth longest recovery since World War II. Although the recovery has been sluggish—GDP has averaged just over two percent a year, the labor market has shown more impressive progress, until recently. Whether or not this is the beginning of the end for the robust gains in job creation is unknown at this point. What’s seems knowable is that the Fed is not going to raise rates amid the current environment.

Last week, Fed Chair Janet Yellen said that the central bank would likely to raise interest rates “gradually and cautiously” because raising them too quickly could trigger a downturn to which the Fed may have limited tools to respond. Given this report, it would seem that caution would be appropriate at the June meeting.

MARKETS:

• DJIA: 17,817 down 0.4% on week, up 2.2% YTD
• S&P 500: 2000 flat on week, up 2.7% YTD
• NASDAQ: 4942 up 0.2% on week, down 1.3% YTD
• Russell 2000: 1164, up 2.5% on week, up 2.5% YTD
• 10-Year Treasury yield: 1.7% (from 1.8% a week ago)
• July Crude: $48.62, down 1.4% on week
• August Gold: $ 1,242.90, up 2.2% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.35 (from $2.32 wk ago, $2.76 a year ago)

THE WEEK AHEAD:

Mon 6/6:

Janet Yellen speaks

Tues 6/7:

8:30 Productivity and Costs

3:00 Consumer Credit

Weds 6/8:

10:00 Job Openings and Labor Turnover Survey (JOLTS)

Thursday 6/9:

Friday 6/10:

10:00 Consumer Sentiment

2:00 Treasury Budget

April Jobs Report: The Two-Tiered Recovery

The April jobs report continued the saga of a two-tiered labor market. The economy added 160,000 jobs and the unemployment rate remained at 5 percent. Revisions to the previous two moths amounted to 19,000 fewer jobs than originally reported. But the broad numbers may not paint a true picture of the employment landscape. The biggest complaint is that overall wage growth has been unimpressive. In April, average hourly wages increased by 0.3 percent, nudging up the annual increase to 2.5 percent. Given the impressive number of jobs added, most analysts have been promising that wage growth would soon follow, but annual wage growth has remained between 2 and 2.5 percent for the past few years, below the near-3 percent seen in previous expansions. While 2.5 percent is not a bad number, we have been here before and now need to see consistent readings that are trending higher.

It’s not supposed to work this way. If employers are having a hard time filling positions, and workers are more willing to jump ship, wages should be rising faster. However, according to economist Joel Naroff, “No matter how tight the market may be, companies are still willing to go without new hires and limit pay increases.”

It may be that the labor market is not quite as healthy as the top line measures indicate. In addition to the 2.1 million Americans who have been out of work for more than six months, the number of workers who work part-time but would rather be full-time remains at a still-elevated 6 million. According to research from the Federal Reserve Bank of Chicago, the high numbers of “part-time for economic reasons” is a contributing factor to limiting wage growth.

What appears to be happening is that workers in the high growth fields can demand higher wages, but the vast majority of workers either don’t feel like they have bargaining power or have made a different kind of adjustment: if the boss can’t pay me more, maybe I will work a little less. This could be part of the reason why worker productivity has dropped off. According to the Labor Department, in the recent 2007-2015 period, annual labor productivity has slowed significantly to 1.2 percent, the worst period since the late-1970s to mid-1980s. Naroff says the downshift is understandable because “until workers have reasons to work harder (i.e., greater compensation), they will find ways not to work harder.”

Of course, with corporate earnings set to drop for a third consecutive quarter, companies are unwilling to take the first step to incentivize their workforces. This strange game of chicken is unlikely to continue for too much longer. Unfortunately, there is probably an equal probability that we see a downshift in the economy, which would spur workers to step it up; and an uptick, which would force companies to pay more.

MARKETS:

• DJIA: 17,740 down 0.2% on week, up 1.8% YTD
• S&P 500: 2057 down 0.4% on week, up 0.6% YTD
• NASDAQ: 4736 down 0.8% on week, down 5.4% YTD
• Russell 2000: 1114, down 1.5% on week, down 1.9% YTD
• 10-Year Treasury yield: 1.78% (from 1.83% a week ago)
• June Crude: $44.66, down 2.7% on week
• June Gold: $1,294.00, down fractionally on week
• AAA Nat'l avg. for gallon of reg. gas: $2.21 (from $2.21 wk ago, $2.65 a year ago)

THE WEEK AHEAD:

Mon 5/9:

China CPI/PPI

Tues 5/10:

Walt Disney

6:00 NFIB Small Business Optimism Index

10:00 JOLTS

Weds 5/11:

Macy’s

2:00 Treasury Budget

Thursday 5/12:

Kohl’s, Ralph Lauren, Nordstrom

8:30 Import/Export Prices

Friday 5/13:

JC Penney

8:30 Retail Sales

8:30 PPI

10:00 Consumer Sentiment

Leap Day for Investors

Leap Day (Feb 29) occurs every four years, so will this year’s be more like 2012, when the US economy grew by 2.3 percent or the more ominous 2008, when it contracted by 0.3 percent? I’m guessing that it will be a 2012 kind of year. To recap, anxiety over a global growth slowdown, a precipitous slide in oil, an increasing US dollar and a potentially over-aggressive Federal Reserve has increased the recession chatter this year. The latest round occurred last week, after it was reported that world trade in 2015 dropped to the lowest level since the financial crisis, due in large part to the slump in China and other emerging economies.

Even with a slight revision higher, Q4 US growth was at a still-paltry 1 percent annualized pace, close enough to zero to make even the most ardent bull nervous. But according to economist Joel Naroff, “It is hard for the U.S. economy to fall into recession if the consumer is spending and guess what, that is happening. Consumption was strong in January and it was across the board. Solid gains were posted for durable and nondurable goods as well as services.  More importantly, households can keep up the pace, as income growth was robust.”

There will be fresh data on the labor market, when the government releases the February employment report. The consensus sees an uptick in job creation to 185,000 from January’s lower than expected 151,000. The unemployment rate is likely to remain at 4.9 percent and with labor market conditions tightening (jobless claims remain low and job openings are high); hourly wages should rise by 2.6 percent from the prior year. If that’s the case, then consumers should keep spending at a moderate clip, which would help propel growth in the first quarter to at least a 2 percent annualized pace.

Despite the economy’s middling progress, it’s hard to see a widespread recession developing in the near term. As a reminder, the National Bureau of Economic Research's Business Cycle Dating Committee is the organization that keeps track of business cycles. While there is no fixed definition of economic activity, the Committee draws on various measures of broad activity, which Morgan Stanley has defined as “The Four D’s”:

• Deceleration: Every classical business cycle slows before it contracts, so look for a pronounced slowdown first. While Q4 looked weak, there is ample evidence that there will be a recovery in Q1.
• Diffusion: The weakness must be widespread across industries. Outside of energy and manufacturing, activity in the rest of the economy appears to be OK
• Depth: Broad indicators such as employment, income, production and sales need to contract by at least 1.5 percent from their cyclical peaks.
• Duration: The NBER looks for a period of at least six months of contraction in the economy to be convinced that the episode was a recession

MARKETS: US stock indexes have rallied more than 6 percent from their lows reached on Feb. 11, narrowing year-to-date declines.

• DJIA: 16,640 up 1.5% on week, down 4.5% YTD
• S&P 500: 1948 up 1.6% on week, down 4.7% YTD
• NASDAQ: 4590 up 1.9% on week, down 8.3% YTD
• Russell 2000: 1037, up 2.7% on week, down 8.7% YTD
• 10-Year Treasury yield: 1.77% (from 1.61% a week ago)
• Apr Crude: $32.78, up 3.2% on week
• Apr Gold: $1,223, down 1% on week
• AAA Nat'l avg. for gallon of reg. gas: $1.74 (from $1.72 wk ago, $2.37 a year ago)

THE WEEK AHEAD:

Mon 2/29:

9:45 Chicago PMI

Tues 3/1:

Dollar Tree

Motor Vehicle Sales

9:45 PMI Manufacturing Index

10:00 ISM Mfg Survey

10:00 Construction Spending

Weds 3/2:

8:15 ADP Private Jobs

Thursday 3/2:

Costco

8:30 Productivity and Costs

9:45 PMI Services Index

10:00 Factory Orders

10:00 ISM Non-Mfg Survey

Friday 3/3:

8:30 Feb Employment Report

Janet Yellen Pulls an Emily Litella

There are just three more jobs reports before the December Federal Reserve policy meeting and each one is carries even more weight than usual. The September data are out this Friday and the consensus is for the economy to add 200,000 jobs and for the unemployment rate to remain at 5.1 percent. While the pace of job creation has slowed from last year (it was hard to imagine that we could sustain 300,000 per month), even the Fed had to admit that gains in the labor market have been “solid”. So what are the central bankers looking for to convince them that labor market slack is diminishing? My guess is that high on the list would be to see annual wage growth pick up from the sub-par 2 percent level and move towards 2.5 percent; an increase in the participation rate (the number of people employed or actively looking for a job); a continued drop in part time workers who are seeking full time positions; and a decrease in the number of long-term unemployed.

Although the jobs report is the main focus the week, the Fed is also likely to examine data on manufacturing. And spillover from the slowdown in China and other emerging markets is likely to be seen in that sector. If manufacturing indexes hold steady, it would likely provide some solace to Fed officials concerned about a global economic deceleration.

Meanwhile, last week, Yellen seemed to brush aside the China worrywarts, when she said “we do not currently anticipate that the effects of these recent developments on the U.S. economy will prove to be large enough to have a significant effect on the path for policy.” In that same speech, Yellen also said that she expects “inflation will return to 2 percent over the next few years as the temporary factors that are currently weighing on inflation wane”.

So if the labor market is solid, global slowdown worries are overblown and inflation is likely to gradually increase, why didn’t the Fed raise rates at the last meeting? As Weekend Update’s Emily Litella (Gilda Radner) would say “Never Mind”.

But wait; maybe Congress will trump the Fed’s rate increase mission. Even if lawmakers pass a continuing spending resolution to keep the Federal government open through December 11^th, that’s just FIVE days before the last Fed meeting of the year. It could be déjà vu all over again (RIP Yogi), as we hurtle to the end of the year, talking about the raising the debt ceiling and defaulting on our obligations. Isn’t this fun?

MARKETS: The biotech sector is under siege again, as it has been at various times over the past couple of years. The biotech index tumbled 13 percent on the week and is now in bear market territory, off 22 percent from its recent high in July.

• DJIA: 16,314 down 0.4% on week, down 8.5% YTD
• S&P 500: 1,931 down 1.4% on week, down 6.2% YTD
• NASDAQ: 4,686 down 2.9% on week, down 1% YTD
• Russell 2000: 1122, up 3.5% on week, down 6.8% YTD
• 10-Year Treasury yield: 2.17% (from 2.19% a week ago)
• November Crude: $45.70, up 1.5% on week
• December Gold: $1,145.60, up 0.6% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.29 (from $2.30 wk ago, $3.34 a year ago)

THE WEEK AHEAD:

Mon 9/28:

8:30 Personal Income & Spending

10:00 Pending Home Sales

Tues 9/29:

9:00 Case Shiller Home Price Index

10:00 Consumer Confidence

Weds 9/30:

8:15 ADP Private Payrolls

9:45 Chicago PMI

3:00 Fed Chair Janet Yellen speaks at Conf of State Bank Supervisors

Thurs 10/1: 9:45 PMI Manufacturing Index

10:00 ISM Manufacturing Index

10:00 Construction Spending

Fri 10/2:

8:30 September Employment Report

10:00 Factory Orders