The what. A new week dawns. The focus, from a macroeconomic perspective shifts back to inflation, away from the build-up to last week's July employment surveys released on Friday by the BLS. Both the S&P 500 and the Dow Jones Industrials closed at record highs on Friday, as equity markets generally shaded green for the day and week. The Nasdaq Composite, which was the large-cap leader for the week (+1.1%), actually took the day off (-0.4%) on Friday, seemingly unimpressed with a report on jobs and job creation that all economists that I follow painted as nearly flawless.
From a Sector-Select SPDR ETF perspective, the Financials (XLF) led performance tables for the week, +3.7%, mostly on the strength of a 2% move on Friday that came in response to a sharp selloff across the middle to longer end of the U.S. Treasury yield curve toward week's end. The benchmark U.S. 10 Year Note paid as little as 1.13% at that product's peak on Wednesday, and as much as 1.31% at that market's low on Friday. (New kids: Bond yields move inversely to bond prices.)
This was the main story across financial markets as that 10 year yield retook both its 21 day EMA and 50 day SMA on Friday. Monday's story may be told by the ability of this particular yield to hold on to those levels, or not.
To say that investors have been left to interpret more than a little in the way of impactful information would be an understatement. From an earnings' season that has been about as positive as possible to the wall to wall coverage of an infrastructure bill worth anywhere between $550 billion and $1 trillion (Depending on whether or not the journalist covering the story includes repurposed funds in his or her story or only counts new money.) that still has not passed, to that jobs report, those deciding whether to put money to work or to rest have had their hands full.
After earnings, infrastructure, and jobs, there's still the ongoing saga of the future of monetary policy (Two and a half weeks till Jackson Hole), the stickiness of consumer level inflation, global relations or lack thereof with Beijing, and the impact of that darned coronavirus upon the whole of it all that must be factored into the grand mosaic of any investor's decision making process. Not to mention just trying to stay healthy.
To your immediate front, the U.S. Senate reconvenes at noon on Monday (today) and that infrastructure bill could pass that soon, or maybe later this week. What stands in the way are disagreements over how to tax cryptocurrency transactions, how to permit municipalities to spend unused COVID relief funds and broad concern among fiscal conservatives on both sides of the aisle that this "smaller" bill ultimately unleashes what will be a much larger ($3.5 trillion?) socially focused spending package that many see as another reckless step toward Modern Monetary Theory.
Readers may recall that ahead of the release of last week's July employment survey data by the BLS that I offered a heads up that July was typically a negative month for job creation and that the seasonal adjustment for that reason pointed toward a big headline number.
Now, you all know that the BLS reported July Non-Farm Payrolls growth of 943K on Friday, as the Unemployment Rate dropped to 5.4% and the Underemployment Rate dropped to 9.2%. These wonderful numbers were joined by a Participation Rate that moved up to 61.7%, an Employment to Population Ratio that popped all the way from 58% to 58.4%, an average workweek that held at an elevated 34.8 hours, and average hourly earnings that improved to an annual growth rate of 4%.
Show of hands... How many of you heard or read anywhere that job creation was negative in July? Not just negative, as in a lousy report, but that job creation printed an outright contraction for the month? Nobody? Hmmm... nice job, financial media. It's true. That's how powerful the seasonal adjustment is for July. This is one reason why I so often show such a personal dislike for seasonal adjustments. They distort the truth. No, it's not political. I am not uncovering an agenda to deceive.
It's just that when unseasoned job creation prints at -133K as it did for July (Those working for local governments in the field of education saw a drop in 901K jobs probably in most cases, just for the summer), that is the real number if those persons are either going without wages, or relying on state level jobless claims for sustenance. The private economy grew an honest 779K jobs in July, almost in line with the 703K reported after being salted and peppered.
Remember that "awful" NFP print for May of 278K. Did you have any idea that the "honest" NFP job creation number in May was 958K? Bet not for most of you. Just understand that in the attempt to smooth out the data, the data becomes distorted. If the breadwinner in your family either loses or gains a job, it does the family no good at all to pretend that it's seasonal. Why should we then pretend as a society? The uneducated (on these matters) would be more fully cognizant of the broader state of societal welfare if they were just told the truth. They can handle learning that certain months are either typically good or bad for employment. You play them the fool by treating them like children. Bottom line. Job creation had been better than what was reported all spring long, and conversely was a drag on the economy in July.
The "season" nears completion. 89% of the S&P 500 is now "in the books" for the second quarter. According to FactSet, which is always my "go to" for such information, 87% of firms having already reported have beaten expectations for both profitability and sales. The blended (reported + expected) rate of year over year earnings growth for the period is now up to what will be the highest rate of growth since Q4 2009 at 88.8%. Revenue growth now stands at 24.7%.
Analysts in general (sticking with FactSet) have taken their outlook for full year 2021 up to earnings growth of 41.6% on revenue growth of 14.3%, and for full year 2022 down to growth of 9.5% on revenue growth of 6.5%. The bull run for stocks and improved outlook for the rest of this year have taken the S&P 500's forward looking (12 months) PE ratio down to 21.1 times from 21.4 times just a few weeks ago, despite the market's northerly trajectory.
Back to the sector based SPDRs, Consumer Discretionaries (XLY) now trade at a stunning 31 times forward looking earnings, while Energy (XLE) and Financials still trade at less than 14 times. Traders might want to note that at 16.9 times forward earnings, Materials (XLB) remains the only sector SPDR ETF trading below its own five year average (17.8 times). Undervalued? Harbinger of a period of slowed economic growth? Maybe a little bit of both. Readers know I remain long a basket of materials-based stocks, such as Alcoa (AA) , Freeport-McMoRan (FCX) , and Southern Copper (SCCO) , while also expecting potentially slower growth.
Interestingly among those three, Alcoa has easily been the outperformer, while Freeport has been the dog. Now, Southern Copper is up modestly from where I bought it, but stands out for value type investors. While trading at a slightly above average (for the sector) 14.6 times FPE, SCCO has increased the dividend payout for five consecutive quarters, and now yields 5.5%. Good times or bad... 5.5% is quite meaningful.
One thing we know is that the current wave of the pandemic just seems to be getting worse. Bloomberg News ran a headline story over the weekend that the city of Austin, Texas (population 2.4 million) had but six ICU beds left unused. How much will the spread of the virus, most especially in states that quite honestly least respected how awful this virus can be, damage the economic recovery? Or the labor market? That "robust" July jobs report was largely compiled prior to the understanding that the Delta variant was going to spike as it has.
Schools will open. Masks would probably reduce the spread. That's common sense. Still some leaders and individuals rebel as if it can't happen to them. Common sense is rare in many parts of the country these days. The unvaccinated will suffer more than the vaccinated. This variant does not discriminate by age as other variants had. The children are all unvaccinated. Your kids. This is not rocket science, but it is science. Will single parents and second earners be able to participate in labor markets this autumn? Will those working from home continue on or have to do so longer term than anyone hoped? I know I work better with other smart people around.
Still, even with large numbers of jobs remaining mobile, that worker will buy less gasoline, will not buy a coffee and a bagel on the go in the morning, will not hit a strategically located deli or pizzeria for lunch, and will not grab a snack on the way home. They also will not spend for office appropriate apparel, get haircuts as often, or buy bus, cab, or train fare. The knock on effects of this virus are less ancillary spending on top or reduced participation. Forget about taking a client out to a nice meal or a ballgame.
On NBC's "Meet The Press" on Sunday, Dr. Anthony Fauci expressed hope that the FDA would fully approve the Pfizer (PFE) / BioNTech (BNTX) vaccine at some point later this month. The application for full (not just Emergency Use) Authorization for this particular vaccine was completed back in May. Moderna (MRNA) filed for full authorization on June 1. Johnson & Johnson (JNJ) has still not filed. The FDA is expected to provide to the nation a "booster shot" strategy by early September... and we wait. As more time and space is put between those vaccinated first (who are our most vulnerable) and the present. Tick, tick, tick, tick...
ARK Invest (ARKK) will hold their monthly webinar tomorrow, August 10th. Expect to hear potentially market moving news in regards to Cathie Wood's forward looking opinion of holdings Robinhood (HOOD) , Zymergen (ZY) , and Pinterest (PINS) , not to mention what she may or may not say in regards to Chinese corporations listed in the U.S.
Economics (All Times Eastern)
10:00 - JOLTs Job Openings (June): Last 9.209M.
The Fed (All Times Eastern)
10:10 - Speaker: Atlanta Fed Pres. Raphael Bostic.
10:30 - Speaker: Richmond Fed Pres. Tom Barkin.
Today's Earnings Highlights (Consensus EPS Expectations)