U.S. markets arise on Tuesday morning after what at least felt like an "up" week, even if that week ended with what felt like a "down" day. The fact is that trading volumes tailed off significantly and that will continue this week in a holiday environment.
The BLS reported nearly disastrous results for their twin employment surveys for the month of August. This tops off what has now been weeks to months of inconsistency in headline-level macroeconomic performance on a national level, way too early in this recovery for such uneven performance to feel comfortable even if it may or may not have been predictable.
We must ask ourselves, and each other, just what this means in terms of forward-looking market and economics performance. As of today, 11 million or so Americans have just received their final "paycheck" or federal stipend" as pandemic-era emergency federal assistance programs expired with Labor Day.
The S&P 500 closed virtually unchanged on Friday, but up 0.6% for the week, the Nasdaq Composite and Nasdaq 100 both closed up on Friday, as well as up about a percent and a half for the week, while indices seemingly directly reliant upon economic direction moved in opposition to each other. The Dow Transports gave up a full percent for the day as well as the week. Small-to mid-cap stocks showed real indecision. All indices representative of small stocks moved backwards on Friday, but for the week, the Russell 2000 rallied 0.7% while the S&P 400 and S&P 600 both shaded red.
Very interestingly, for the five trading sessions that comprised the past week, seven of 11 sectors shaded green, but the four sectors that shaded red are all cyclical in nature, while defensive-type sectors easily stole the Wall Street show. Even as the U.S. 10-Year Note sold off hard last week, yielding less than 1.29% at one point on Thursday, only to rise above 1.32% in response to the unexpectedly weak August jobs report.
Yields have continued to rise over the long weekend. I see the 10-year paying more than 1.36% early on Tuesday morning, which is competitive, by the way, with the 1.35% Q2 S&P 500 annualized dividend yield. Seems odd that yields would spike in the face of poor economic performance, doesn't it? Wasn't good... bad, and bad... good when considering the trajectory for forward-looking monetary policy?
Let's Ask a Prussian General
General, what's going on here?
"Although our intellect always longs for clarity and certainty, our nature often finds uncertainty fascinating."
-- Carl von Clausewitz
That means?
"Two qualities are indispensable: first, an intellect that, even in the darkest hour, retains some glimmerings of the inner light which leads to truth, and second, the courage to follow this faint light wherever it may lead."
-- Carl von Clausewitz
So.... What should investors do here?
"Pursue one great decisive aim with force and determination."
-- Carl von Clausewitz
General, I think you're saying, stick to what you understand, while staying open minded...
"Principles and rules are intended to provide a thinking man (person) with a frame of reference."
In short, I think the general is telling us to adapt our investment principles to the dynamics of the current situation.
I'd like to thank General von Clausewitz for participating in this morning's discussion, but I'll take it from here. Focus on what you do best as a trader/investor. Maintain all disciplines designed to prevent disaster. Diversity, with a bias, across asset classes. Target Prices and Panic Points on everything. Incremental entries and exits.
What I'm saying is that you have probably already had one heck of a year if you've been in these markets. It is more than OK to underperform to upside over the balance of the year as long as the trade-off is under-performance to the downside... if I've worded that correctly. I think you know what I mean.
Consider This
It is no secret that the current pace of consumer-level inflation has caught the attention of those comprising the decision-making body of the Federal Reserve. While most Fed officials still see much of the upward pressure on prices (July CPI: +5.4%, July Core CPI: +4.3%, August CPI due a week from today) as transitory (and for the most part I think I agree), there is enough lack of clarity to provoke at least the intent to wind down the Fed's balance sheet expansion program sooner rather than later.
The August picture for job creation is jarring, especially when one looks at the raw data, and backs out of all seasonal adjustments. As long-time readers well know, I have often spoken out against using seasonal adjustment for anything other than educational purposes. The real world is reliant upon results.
Seasonality is a helpful tool in the making of projections, or in making comparisons, perfect for classroom use, but in no way should seasonally adjusted data be reported at the headline level as if fact. That's one way investors make errors as seasonally adjusted data (perhaps innocently) misrepresents fiction as fact.
The United States is still mired in the throws of pandemic as is most of Planet Earth. 2021 bears little resemblance to the first year of the pandemic, 2020, or any pre-pandemic year for that matter. If you are the one whose business has declined, or has been tapped on the shoulder, seasonality means exactly "squat" to you.
According to the BLS, the U.S. economy (backing out of all seasonal adjustments) lost jobs in August. There was not only no net job creation, there was net job destruction. There were, according to the data, 364,000 fewer employed persons in the labor market in August than there were in July. Guess what? This is kind of normal.
There was job creation in August 2020, which was an outlier. There was net negative job creation for August from at least 2011 (how far back I went) through 2019. Lousy performance is quite the norm in August. The August surveys, as I wrote to you ahead of time, though I did expect better, are from a macro perspective, meaningless. From a micro perspective, there are hundreds of thousands to now probably millions (as we move past Labor day) of financial tragedies taking place, or about to take place in real time.
Readers with a keen interest in accurate data, would probably be interested to know that the number of unemployed persons also contracted in August, by some 665,000, as 1.17 million folks left (rolled off) the back end of participation. This is why the Participation Rate remained 61.7%, the Unemployment Rate "improved" to from 5.4% to 5.2%, and the Underemployment Rate dropped to 8.8% from 9.2%. Not because labor markets improved.
Now, for September, the total number of those participating decreased in both 2019 and 2020, but increased for the two prior years... 2017 and 2018. This year, we already know that up to 11 million new folks who probably have not looked for work in a while will at least feel pressure to do so. No way to dress that up or down seasonally. There is a good chance that over the months of September and October, both Employment and Unemployment soar simultaneously, with intense downward pressure on wage growth.
The fact is that the harsh winds of change are about to hit large numbers of potential laborers in every state. It's probably better, from a statistical point of view, to treat the remaining months of 2021 in isolation, as there is no effectively useful comparison that can possibly be made.
Bottom Line
We now know that the labor markets, at least for jobs across the lower half of the income distribution curve, will become far more robust, an actual two-way, bid-and-offer market, than they has been for more than a year and a half.
We know that the Atlanta Fed's GDPNow model is running at 3.7% (q/q SAAR), while the New York Fed's Nowcast GDP model is this >< close at 3.79%.
We know that last week, Morgan Stanley took their Q3 U.S. GDP model down to 2.9% from 6.5% in one fell swoop. Economists at Goldman Sachs cut their full-year 2021 U.S. GDP growth forecast to 5.7% from 6.2% this morning after taking their Q3 2021 expectation from a ridiculous, even at the time it was made, 9%, down to a probably still unrealistic 5.5% three weeks ago.
What this does is open a few doors. Left In isolation, rapidly slowing economic growth coupled with rapidly rising consumer-level inflation would bring about stagflation, a phenomenon that most Americans under the age of 50 or so, don't seem to understand is to be feared.
How to avoid, or at least delay such an unwelcome future? For one, many of the forces contributing to current levels of inflation can be corrected -- such as unkinking supply chains or manufacturing more goods and components of goods, domestically. Of course, there is still a mutating virus out there, and the virus may have more of a say in this than any human response to conditions of scarcity, or policy response. We just witnessed an entire nation of packed college football stadiums across many of the most highly impacted (by the Delta variant) states. My guess is that we'll know shortly if it is safe or not for groups of 75,000 people or so to pack tightly together (vaccinated or not) and scream, cry, celebrate and commiserate. I am hopeful.
While it would appear that an economy suddenly struggling to greater degree than anticipated might have the Fed slow down on moving toward a tapering of monthly asset purchasing, it might also wake the Fed up to the reality that they have to get their house in order ahead of the next shoe to drop. The Reserve Bank of Australia just announced a tapering even with two provinces in complete lockdown.
Then again, a struggling economy could force more aggression from those U.S. legislators pushing for both the infrastructure bill as well as for a larger-sized social spending package. West Virginia Senator Joe Manchin (D), made his views clear last week.
Does this, or will this give the fiscal doves more ground to stand upon? It might. Good chance, just my opinion, that everyone in a decision-making capacity across our fiscal and monetary environment, slows down the process on everything -- except addressing the debt ceiling, until as late as early November.
TINA? I don't know if we can trust her this time. I mean I do think she shows up, but I don't bet the ranch on anything. Especially not now.
Economics (All Times Eastern)
No significant macroeconomic data-points scheduled for release.
The Fed (All Times Eastern)
No public appearances scheduled.
