The April employment report ranks right up there in my personal "Darn Tough to Handicap" top-50 list. I honestly have little feel -- only calculated guesses -- as to how market sentiment will develop immediately after the announcement, how long that sentiment will be sustained for the session and then how is will craft into the outlook for the next couple of weeks.
The hidden messages of the market were that conflicted in the days, hours, minutes, and seconds in advance of the report. Also remember that this confusion arrives as earnings season is rounding the home stretch for the first quarter. Essentially, I suppose, this set of numbers, plus the topic of the moment from Europe, will be hanging around until the May jobs figures are issued after four weeks of jobless claims.
By the time you read this column, your head is likely to be spinning in an attempt to outfox everybody else, so here is a basic template for surviving the hours of pre-weekend investing insanity.
A Reminder Where Things Stood
Overarching negativity: The negativity in the market was valid, given the elevated initial claims trend, and ditto on assorted global macro reports. The optimism in employment component of the the Institute for Supply Management's manufacturing survey was trampled by ADP and the soft ISM-services release.
Nitty gritty: The sentiment was confused to negative. Jobs estimates were ratcheted down since I began compiling notes two weeks earlier. The table was set for a buy the news Friday -- an in-line or slightly better-than-expected headline should have tested the resolve of the bears. The confused aspect was the lack of a concise game plan, should payrolls fall short of lowered forecasts.
My first thought here was that first-quarter sales and earnings are useless. My second thought was that "fiscal cliff" would meet a period of moderate to minor organic economic growth. Thirdly, I figured more Federal Reserve accommodation would have had a lagged impact, leaving stocks vulnerable to the downside. When you hear the word "uncertainty" every which direction on the Street, these are but a few of the concomitant internal discussions.
Earnings season tells: Since the middle-of-last-week earnings surprises have been rewarded, we've seen a shift from the start of the reporting season. These moves will likely have to be reassessed by the market if payrolls come in light.
Now, the survival guide:
Scenario 1: Sunny Day
- Jobs beat
- Unemployment hits the 8.2% forecast
- Manufacturing employment solid
- Retail employment (a large disappointment in March) bounces to match first-quarter sales strength.
Stocks should catch a bid as the numbers render the reams of negativity to be overblown. Organic economy is stronger than priced into equity valuations -- Greenspan, after all, says stocks are "very cheap," and he seems to be a smart dude. But the jobs market is still not be robust enough to remove the Fed from the equation, and interest rates remain low and long till 2014.
Should this scenario unfold, I believe entering new longs would be ideal, possibly in oversold industrials such as a Caterpillar (CAT) or a value in the weeds, such as Molson Coors (TAP). Basic premise: Oversold conditions took too deep a root, and that has to be repriced.
Scenario 2: Partly Cloudy
- Jobs in-line to reduced estimates.
- Unemployment rate increases slightly as people reenter the workforce (consumer confidence measures do continue to suggest jobs-market optimism)
Stocks pull back as the economy enters this weird zone: in-line jobs, folks returning to the workforce and leaving discouraged, and the Fed's helping hand of extraordinary stimulus being unable to improve these things.
In this scenario, leading stocks, or those afforded relative premiums, would strike me as optimal short candidates -- valuation deserves to be reined in, given the so-so macro picture.
Scenario 3: Rainstorm
- Jobs miss.
- Unemployment rate rises.
Quite simply, look out below, because the pre-report hesitance will have been confirmed. Strategists start using the line, "Don't catch a falling knife." Bears gain control, and the March 31 high on the S&P 500 gets further away from reach. Treasury prices increase. Not only is the organic economy perceived as subpar and first-quarter earnings upside a weather-induced fluke, but the power of the Fed to inflict near-term dramatic trend change is limited.
Ready for all this? I sure am. Hit me on Twitter @BrianSozzi with any questions or comments on the report. I'm here here to help as much as possible. Not a big Twitter buff? Shoot me an email.