Today is jobs Friday and the last jobs report before the mid-term election. What will it suggest? Will the data disappoint for the second consecutive month or will it surprise on the upside? In my view the markets have discounted either scenario.
Some are fearful if job creation downshifted again, the Fed has little left in the proverbial quiver. Conversely if the data surprises on the upside, monetary policy timing assumptions will be challenged. As stated above because of market volatility, I think barring a major surprise in either direction, I think there is little equity risk.
Can or will this data influence the election 30 days away? According to a recent Gallup Poll, 83% of registered voters say the economy is “very important” in casting ballots, beating all other issues.
Again referencing Gallup, the President since reelection only has a 38% approval rating regarding his handling of the economy. This is the lowest rating of any presidential term since President H.W. Bush’s 35% average score.
It is correct the economy finally created all jobs lost in the recession in May, but according to the BLS 29 of 50 states has not yet matched this accomplishment. Most of these under achieving states are in the “progressive North East” and “blue states.”
It is widely known the mid-term election of any second term president is ugly for the incumbent as seats are traditionally lost for the party who is occupying the White House.
The narrative is rising to feverish pitch that the Republicans may retake the Senate, an observation that has considerable merit because of the above statistics.
In my view today’s data will not impact the Democrat’s chances of maintaining the Senate. If the statistics disappoints, the information may be the proverbial final nail in the coffin.
If the information surprises on the upside, the data is too late to change perceptions, especially negative perceptions about integrity and the economy, both of which are close to impossible to change, much less change dramatically in 30 days.
I will adamantly argue the recent selloff has created strong opportunities in many aspects of the markets, perhaps most significantly the small caps, commodity sensitive issues and non-investment grade rated debt.
Commenting about the latter, there has been a brutal change in the perception of this credit cycle, a change that has occurred in the last 30 days. Prices have been crushed, perhaps the result of the changing trading landscape as mandated by Dodd Frank. The only other time I have experienced such decimation was 2008-09.
Will this decimation be short lived as strong case can be made that most have over reacted?
Cash is at gargantuan levels earning no interest. Companies in the S & P 500 are the healthiest in decades with the lowest net debt to earnings ratio in 24 years according to Bloomberg. Corporate cash is at a record of $3.59 trillion and growing because of record profits and near record profit margins.
Valuations are not extended but pessimism is great which led to overreaction.
I will argue the proverbial spring for a market advance has been wound, looking for a catalyst.
Will today’s data coupled with next week’s commencement of the third quarter earnings announcement amplified by a rising confidence of change in Washington be the catalyst?
As noted earlier, I think prices in many markets have been discounted for several scenarios.
Returning back to the employment report, consensus is expecting a 6.1% unemployment rate, a 215K and 210K increase in nonfarm and private sector payrolls, respectively, a 0.2% increase in average hourly earnings, a 34.4 work week and a 62.8% labor participation rate.
Commenting about yesterday’s market activity, shares rebound from triple digit losses on speculation the current rout went too far too fast. The hapless Russell 2000 vastly outperformed the NASDAQ 100, the first time in months, rising by 1.03% versus unchanged for the large cap brethren. Oil again led commodities lower. The 10-year was off 7/32.
Last night the foreign markets were up. London was up 0.93%, Paris up 0.51% and Frankfurt was closed for a holiday. Japan was up 0.30% and Hang Seng up 0.57%.
The Dow should open ci=considerably higher but this could change radically given the significance of the 8:30 data. The 10-year is off 4/32 to yield 2.44%.