Greasing the Skids


“I’m not crazy about reality, but it’s still the only place to get a decent meal.” – Groucho Marx

Nothing has changed with the domestic or global economy in recent weeks, and that is the key to the ability of equities to keep slugging out new highs. We are in a proverbial wall-of-worry climb that the market is too expensive (it is) or that stimulus may not arrive (unknown) or might not help all much anyway (probably not). Only time will tell on the last matter, but we are now in a place familiar to market veterans – widespread expectations that the whole thing is bound to end shortly in a bad way means that every time the news isn’t actually terrible, it is perversely good. Bit by bit, complacency gives way to a feeling of invulnerability, and pedestrian events that should have been discounted long ago end up fueling new rallies because, after all, they did happen when we really couldn’t be sure that they would, could we?

The eccentricity of current presidential behavior is a solid piece of the bedrock supporting this structure. President Trump does have believers on the Street, but they are mostly believers in tax cuts and no regulations. Investors dislike uncertainty, and the presidential Twitter feed is anything but predictable (beyond knowing that most of us will be shaking our heads for one reason or another). So far as the stock market is concerned, this means that every time the worst outcome doesn’t come to pass, it sets the table for another relief rally.

Markets don’t always behave this way, but they do act this way at the end of bull markets. The current bull will soon be 100 months old. You may be as tired as I am of hearing the empty platitude that “bull markets don’t die of old age,” but that neatly overlooks the fact that the investing behavior most difficult to justify in later years occurs exactly at times like the current ones.

As for the Paris climate accord, Wall Street has its share of fervent nationalists, perhaps a bit more than the tech sector but not as much as the energy sector. Some on the Street were no doubt pleased about the recent decision to withdraw from the Paris climate accord, but they are also the people who would celebrate the end of all immigration, the United Nations, and the end of snooty Parisian waiters speaking in French instead of English. None of it has any dollars-and-sense logic to it, it’s just about feeling better, and much of Wall Street behavior is about feeling better.

The truth is that the Paris accord (discord?) has zero impact on current profits, given that disimplementation is years away. For some it was a bullish victory over foreigners and regulations, whether or not that makes sense, but for most Thursday’s rally had to do with a good-looking ADP payroll report that promised 253,000 new jobs in May and a positive ISM manufacturing survey – no different than the last one, mind you, and ain’t that great news? Most of all is the pervasive sense that somehow everything is being put right in some vague way, or at least not going wrong, so you better buy when everyone else buys (or at least not sell).

The more important government jobs report on Friday – only half as many private sector jobs as the ADP estimate – was a disappointment that belayed the notion of a robust economy, so of course the stock market rallied some more: Stimulus! The Fed won’t raise rates now (or at least, not so much). In 2007, the last year of the last bull market, stocks kept rising on the joyful news that an imploding housing sector and economy would force the Fed to cut rates. It did, and those rate cuts turned out to be the perfect time to sell.

Don’t expect accounting logic to overtake stock market logic anytime soon. I’ve been wondering when the usual correction that comes in May-June would come to pass, but that correction often stems from disappointment that events didn’t live up to ebullient hype – the bar was set too high. Currently we’re in such a low-bar situation that the administration can fuel rallies simply by not declaring all-out global war. It’s a weird place, one that can stay weird far longer than you think, but still a terrible time for investing in equities. There’s a reason you’re constantly reading about funds shutting down or producing zero returns – they don’t want to play the greater-fool game. We’ll be proven right in the end, but until that day we’ll be the ones forced to suffer the slings and arrows of sneering complacency. It’s worth having the cash at the right time.

The Economic Beat

The report of the week was the usual one for the first week of the month, the employment report. With an initial estimate of 138,000 (138K) new jobs (seasonally adjusted, or SA) for May, it came as a disappointment. The consensus had been for about 185K, given a hopeful lift on the trading floor by the ADP report that came in much higher, at 253K. The additional insult came in the form of downward revisions for March and April, 66K in all, which are thought by many to be as important or more than the original estimates.

I have often remarked that the ADP report does not try to outdo the government report from the Bureau of Labor Statistics (BLS), but to anticipate the private payroll part of it. Thus, when the BLS has new information beyond the usual factors from weekly jobless claims reports or ISM surveys, or adjusts its seasonal factors, the ADP report can be left scrambling to catch up – BLS private payrolls were estimated to be up only 126K, half the jump in the ADP report.

In this case, I suspect that the BLS has new information coming from the government’s Quarterly Census of Employment and Wages (QCEW) from the first quarter. The report is issued with approximately a two-quarter lag, as there is quite a volume of data to collect, collate and correct (the report is said to cover more than 95% of all jobs, currently around 140 million). The BLS is really in the same position as the ADP during the first quarter, going on smaller sample sizes and adjusting job growth (or decline, as the case may be) with factors such as weekly claims and surveys, like the labor turnover report (JOLTS).

I also wrote recently (also last year around this time) that negative surprises in the jobs report tend to start in the late spring, May-June to be specific, towards the end of the business cycle. When businesses are full up, they tend to slow or stop hiring as demand flattens out, and that trend tends to gain impetus with the turning of the calendar year. The QCEW is usually the first report that catches the shift in trend, especially with the diminution of the manufacturing workforce (more susceptible to layoffs that show up in weekly jobless claims reports).

News from the household survey was more unsettling. The household survey actually showed a loss of 233K jobs, though the household version is much more volatile on a month to month basis. Still, it didn’t have any good news, not even the unemployment rate, which appears to be doing better at 4.3% (down from 4.4% in April), but fell only because the number not in the labor force shot up by a dramatic 608K, comprised mostly of an estimated shrinkage in the labor force of 429K and a decrease in the unemployed of 195K. The drop in the unemployment rate is an arithmetic illusion.

The net of it doesn’t represent such a big change in the year-on-year trend, however, which had already been weakening. The May year-on-year change of 1.54% (based on the initial estimate) is about the same as the 1.46% rate in December and is dead even with the average for the first five months (1.53%). Wage growth is still at a 2.5% annual rate. Job growth has slowed and it could be the beginning of the end, but for now it’s just a mediocre report, not a terrible one.

Over in manufacturing, regional manufacturing surveys from Dallas (22.3 vs. 15.4) and Chicago (eventually reported as 59.4 after a mistake) led to the national ISM survey result of 54.9, virtually identical to the previous month’s 54.8 (50 is neutral). There were more comments than usual about labor tightness, with 15 sectors reporting expansion vs. 2 in contraction. New orders showed good breadth of increase at 59.5. The manufacturing surveys have lagged well behind output still, though April’s industrial production did show improvement. Construction spending began the quarter with a 1.4% decline, perhaps in part due to orders being pushed back into March (on a reporting basis). March now has a gain of 1.1%, originally estimated at (-0.2%), so best to hold off on conclusions about the first April estimate.

Housing continued a recent string of so-so reports with a reported 1.3% monthly drop in pending home sales for April. The Case-Shiller price index stayed steady in March at a 5.9% year-on-year growth rate. The first estimate of the April trade deficit showed some strength in imports and weakness in exports, a combo that is not good for the GDP calculation.

Next week will probably center around geopolitical news, as we will not quite get to the monthly retail sales report, leaving the calendar devoid of big headline reports. Monday will see factory orders (mostly known from the durable goods report) and the ISM service sector survey, with no surprises expected, and Tuesday brings the JOLTS report. Wholesale trade on Friday rounds out a light week.

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