Just like a Transformer, there is often more than meets the eye with respect to economic reports.
Such is the case with the October employment report, which was billed by people on Twitter claiming experience in finance (yet have no true financial services background) as the best thing since sliced bread. One person not partaking in this group orgy on Twitter was yours truly, who stated the employment report stunk through and through.
The report was boosted by seasonal hiring in construction and retail. Long-term unemployment stayed elevated. Part-time workers didn't land part-time gigs. Wage gains didn't accelerate a great deal quarter over quarter, though those same generally clueless folks cited increased hourly rates year over year as progress.
Wrong. It wasn't progress -- it was easy comparisons to a year ago, when large private employers such as Wal-Mart (WMT), Target (TGT) and McDonald's (MCD) were under-paying their overworked workers. That indeed has changed this year due to the push across to the country to hike minimum wages and treat people like humans instead of robots.
Moreover, the weak innards of the report come at a time in which the overarching theme inside the Federal Reserve is that it's time to lift rates. A less-than-stellar jobs report plus the first signs of a hawkish Fed are not a magical backdrop for stocks, and it's certainly a backdrop that is different than the one we have dealt with the past three years (accelerating jobs and an easy Fed). Now, the question you are likely wondering is whether Monday's sell-off in stocks was overdone, and whether it's time to buy in the lead up to the normally strong year-end.
To put it simply, it's unlikely the time to buy stocks as we could be headed into the teeth of a short-term storm. I suspect third-quarter results and holiday guidance from retailers will only add some fuel to the negative sentiment for stocks. But here are five reasons why stocks could struggle in the near term:
- Investors have been conditioned under the Bernanke/Yellen Fed that any slight hints of hawkishness causes stocks to be instantly revalued by the market, with pressure likely sticking around for longer than some believed. Remember the taper tantrum? Remember when the Fed said it would no longer do quantitative easing? Each mere utterance hurt stock prices on fears tighter rates would impact the U.S. economy and emerging markets. At the moment, we are in the same boat -- arguably one with bigger holes for water to penetrate as the Fed prepares to guide us through a possible series of rate hikes in 2016.
- Stocks normally don't do well in a rising interest environment. And for them to do well, the jobs market would need to be very solid, and so would consumer spending. Neither is occurring. The economy is not showing it could handle higher rates, which is quite the sad truth. Hence, stocks need to be marked down to reflect this view.
- The tightening market for workers with low-level skills is pushing up wages in retail, construction and other areas. A problem, however, is that companies are not finding it easy to raise product prices due to competitive conditions and the rise of technology that gives consumers the negotiating power. I think they are also learning that there aren't many areas left in which to slash costs and expenses.
- The Fed's new stance on rates has pushed up the dollar; the employment report only emboldened that stance. Have you seen how the stronger dollar has destroyed sales and profits at multinationals over the past two quarters? It has been brutal to see, and deserving of a revaluing of stocks.
- It's hard for me to prove this is specifically bothering the market because it's more of a sense on my part, but higher rates in the U.S. could send capital to international investments in China and Europe, where governments are displaying a continuing desire to be ultra-accommodative. Hey, why not; there are companies in each country doing well. Might as well invest in them in a backdrop of attractive rates than invest in many U.S. companies now forced to deal with higher rates and souring sentiment in the broader domestic stock market.
Just take a look at the department store stocks over the past month to get a feel for how companies may be hurt by higher rates. Shares of J.C. Penney (JCP) are down 12% in a month, Macy's (M) is down 8%, and Nordstrom (JWN) has shed about 9%. All of these companies are saddled with debt and are undertaking tech-centric projects that have a high cost of capital. Further, in a raising rate environment, consumers putting things on charge cards will become even more unattractive.