“It makes you feel happy like an old time movie.” – The Lovin’ Spoonful, Do You Believe in Magic
The stock market did indeed back off a bit last week, not that it means really means anything. We are in the period of the end-of-year rally, a time when reality doesn’t really matter and stock market behavior shouldn’t be interpreted to mean anything but that 1) a comet isn’t expected to hit the earth before January 1st; and 2) asset managers would like to see prices rise.
The route won’t be straight up, as last week demonstrated, and indeed the first half of December is often a bit in the red before the more serious business of marking the close of the end of the year gets underway. How this December might behave on a weekly basis is even more uncertain than usual, as a steady flow of midnight policy tweets may come into play.
Then again, they may not. The most enduring feature of the so-called Trump rally is the number of enthusiastic participants who believe that only the best features of the incoming President’s program will be enacted, and that he was just kidding about the rest. What those best features are, and what the rest might be, seem to vary with the self-proclaimed believer. but for now the genuine fuzziness about the future and which tweets are serious and which aren’t seems to be helping stock prices. If things stay fuzzy through the end of the month, that should prove beneficial. However, it may not do to make predictions about the unpredictable.
Some pushback has developed about the realities of what may or may not happen during the first few months of the next administration. Many are talking as if a full array of tax cuts will be enacted on the first day after the inauguration, but experience would suggest otherwise. Congress is not famous for doing things quickly, and making tax policy changes, especially sweeping ones, takes time. A target of the summer seems ambitious enough, but many have already baked corporate tax cuts (that might not take effect for as much as twelve months from now) into next year’s earnings.
The Republican party still controls both houses of the Congress, which controls the budget. The Republican leadership was famously slow to embrace the top of their ticket, and there is every reason to believe that Mr. Trump and Congressional leaders are not going to see eye-to-eye on every key issue. Certainly they share some common goals and all parties will want to pass some form of tax cuts and reform, but there is bound to be some devil in the details and contentious battles. Ronald Reagan’s tax cuts were not passed until August of his first year. They did not produce instant economic magic, and it wasn’t until a year later, when the Federal Reserve finally began to cut rates, that a double-dip recession came to an end – and stocks finally moved off from their lows.
An oddity that has cropped up and bears watching is the phenomenon of the reverse trade on political developments. A series of near misses with the Greek crisis readied the ground for a current brand of thinking that one buys in the wake of every major political event, probably on the theory that one can squeeze all the cowards and shorts who had feared the worst. The idea that what doesn’t kill you makes you stronger isn’t new, nor is it new that Wall Street likes to ignore sea changes until it’s too late, but what is remarkable – and dangerous – is the recent enthusiasm for embracing every potentially adverse development as a buying opportunity. The thinking seems to be that if it doesn’t kill you immediately, it isn’t dangerous ever. Perhaps that is so for trading programs that exit in nanoseconds, but there will be payback when valuations regress to the mean, as they always do, or when potentially adverse developments become truly adverse with the passage of time. It isn’t magic.
The Economic Beat
The focus of the week, if not the highlight, was the November jobs report. It was a reasonably good report, to be sure, especially this late in an expansion, but the middling nature of the data failed to ignite much enthusiasm on Wall Street.
Just about every important category fell into the bin of both good news and bad. The headline number of 178,000 (178K) seasonally adjusted was slightly ahead of consensus for about 170,000, but below the ADP guess of 210,000. Perhaps the number from the Bureau of Labor Statistics (BLS) will get revised higher, but ADP sharply revised its October number downward, from 147,000 to 116,000, and indeed the BLS followed a similar path for October, with a downward revision to 142K, of which 135K were attributed to the private sector that ADP follows. It may have been a case of just pushing numbers around from one month to another, as September was revised upward in the BLS report to 208K.
On the other hand, November of 2015 was 280K, nearly all of it private (279K), while last month had only 156K. The year-on-year growth rate for jobs (unadjusted) now stands at 1.58%, the lowest rate for November since 2011, while the year-to-date growth (also 1.58%) is at its lowest November reading since 2010. Year-on-year looks a lot like November 2006 (1.55%) and November 2000 (1.59%), with the business cycle ending the following year in both cases. The diffusion index (a measure of hiring breadth) fell to 55.5 from 59.2 last month and 62.2 a year ago. Manufacturing recorded another month below 50.
The unemployment rate fell to 4.6%, to be sure, but that result was marred by a drop in the participation rate (to 62.7%), a drop in the civilian labor force (-226K), and an increase in the not-in-labor-force category, which saw a steep increase of 446K. It mostly went down for the wrong reasons. That said, the alternative U6 unemployment rate (includes part-timers who want to work full-time and the “marginally attached” category) also fell to 9.3%, the lowest it’s been since April of 2007.
Hourly earnings were the biggest disappointment, actually declining by 0.1%, making the tiny fall the least reported feature of the report. Earnings are supposed to be increasing, not decreasing, and so there was the little enthusiasm for mentioning them at all. What had been considerable focus on the number shifted to a passing “not great.” It’s most likely not any result of declining wages, but a mix issue of new lower-paying jobs outnumbering new higher-paying ones. Average weekly earnings are up 2.2% – rounded up – from a year ago.
Despite a fourth consecutive month of small losses in manufacturing employment – November reported an estimated drop of 4K – the various manufacturing surveys have looked a bit better of late, in part helped out by better oil prices. The Dallas region posted its first positive number in ages, to 10.2 from (-1.5), thanks to increased production. The Chicago purchasing manager index, very volatile in its private incarnation, leapt from 50.6 to 57.6, and the national purchasing manager survey index (ISM) rose to 53.2 from 52.3. The growth-contraction sector score for the ISM was a modest 11-6, but the comments featured in the report notes were broadly optimistic.
Construction spending, at an initial October estimate of 0.5% was lower than the consensus 0.6%, but the year-on-year category rose into the positive column (+3.4%) for the fist time since, well when isn’t exactly clear, as the heavily revised series is now said to be positive all year after several months of appearing to be negative year-on-year. October did represent the first increase in seven months – for now. At any rate, large upward revisions to August and September should help the Q3 GDP estimate, which rose to 3.2% in its latest revision. Four-quarter nominal GDP, however, is still at 2.8%, some forty basis points below the year-ago rate. The current tracking rates for the fourth quarter are in a range of 2.7% to 2.9%.
Next week is a quiet one, with the ISM non-manufacturing report on Monday perhaps the highlight of the week. It’ll be followed by factory orders and international trade on Tuesday. Other reports of interest are the labor turnover report (JOLTS) on Wednesday and the wholesale trade report on Friday. The ECB may make its last stimulus stand next week, but will the market rally regardless? Stay tuned.