Into every life, some rain must fall. The rain came for me on Sunday, when a Word malfunction wiped out all of this week’s column. Even though I had saved my work, the file had become corrupted, along with the backup. After spending the usual bushel of hours in the black hole of computer problems, I managed to recover most of my work. However, all that remained of this week’s column was the header, leaving me to start over without any extra time on my schedule.
For the stock market, the bad weather was about an apparently strong jobs report that seemed to further weaken hopes that the Fed might not move at all this year, let alone stand pat until the fall. A summer rate move looms larger now, and for the first time in the years the market is starting to fear an impending Fed monetary policy (FOMC) meeting. Concerns that the word “patient” will be removed in March, signaling that the odds have shifted in favor of a June tightening, have put a lot of fingers on the sell button.
Such a move would be “data dependent,” of course, as Chair Janet Yellen and her compeers have not failed to remind us for many meetings. Therein lies the rub, because the headline numbers of 295,000 new jobs in February with an unemployment rate of 5.5% look like the kind of handwriting that positively glows on the Biblical walls of prophecy. That the report really wasn’t as good as it looked (see the Economic Beat below) was of no import to price action, particularly the machine-algo sort that has often dominated trading in recent years.
These events reinforce an ever-growing piece of market irony: On the one hand, the mainstream market media is filled with the usual proclamations that this is the year that the U.S. economy will finally rise to 3% real growth (never mind that 2015 marks the fifth year in a row for this yet-to-be-realized prediction), while the other paw maintains a steadfast grip on the insistence that the economy is simply too weak to be tightening now.
It’s a contradiction that both reveals and obscures. What tends to be obscured are meaningless (!) bits of data like lower profit growth and the higher prices for same, while what is revealed is the breadth of this cycle’s surefire, everyone-else-is-doing-it market fad-addiction – the Fed has our back.
At the end of the last century, the herd obsession with dot.com IPOs and their fabulous riches led to the “new economy” and its “new new thing.” Hah! After that crashed and burned, along came the mantra that housing prices never decline. Hah! Now we set course by the lodestar of Fed liquidity – so long as it is there, one must stay steadfastly long. Let me the first to add, “HAH!” And what will also be revealed in this month’s likely correction is the degree to which formerly stout defenders of the invincible American economy meme are frightened at the prospect of the market’s true energy source being taken away – the Fed. Hah, indeed.
Although the signs of a fading bull are multiplying, with even perma-bulls like Jeremy Siegel getting nervous, I don’t think the party is over quite yet. What we are seeing now is the flight of the early movers; I cannot remember a stock market that threw in the towel on the first Fed tightening. Though we are currently in a two-quarter lull for both the economy and profits, the weather and inventory cycle are likely to perk up again in a few months, and if history is a guide, any mid-year tightening by the Fed will be accompanied by noisy Street fanfare about how great the economy and profits are (or are going to be) and how we should be buying instead of selling.
In the meantime, the ride has become bumpier, in no small part due to the disappearance of QE. It’s going to stay bumpy, too, and likely get even bumpier this fall, a time that remains my best guess for the final top of this market cycle. The real message of the jobs report, a lagging indicator, is that we have been at the peak of the economic cycle for some time now, by my own account since last summer. Business cycle peaks typically last about twelve months, with a normal range of six to eighteen months. The clock is ticking.
The Economic Beat
My computer’s word processing malfunction erased a rather painstaking, in-depth analysis of the jobs report, but for that you may be grateful. I will try to return to it in a later report, while limning the highlights here.
First, a gentle reminder that the jobs numbers in the first quarter get a bigger seasonal adjustment than the rest of the year. Every January, about 2% of the outstanding payroll count disappears from the rolls. Some are let go and others move of their own accord, but in either case they are lost from the count. The next few months then see outsized gains in actual sampling estimates until the springtime, when the process settles down again.
It’s a very good idea to seasonally adjust the data in these months, but the estimates are usually going to be on shakier ground, especially when trying to adjust for the weather. The Bureau of Labor Statistics (BLS) doesn’t really know how well its first-quarter estimates are going until the spring, a phenomenon that occasionally translates into big surprises at that time of year.
There are some reasons to think that the BLS February number of 295K is on the high side. The household survey, though a much rougher monthly estimate, showed a 96K gain. The private-sector ADP payroll report showed a 215K gain, well below the BLS number of 288K for the private sector. January was revised downward from 257K to 239K, and many consider the direction of the revision to be as or more important than the number itself. The very high year-on-year gain of 2.4% for February may have more to do with last February’s weakness than the strength of the 2015 edition. In 2014, the polar vortex suppressed the January-February gain in the unadjusted count to a below-average 0.55%, compared to this year’s 0.65%. However, the latter gain isn’t as strong on a percentage basis as 2013 (0.78%) or 2012 (0.73%). In short, the estimate may have been skewed by the weather.
There was still no strength in wage gains (0.1%) and the civilian labor force actually fell, along with the participation rate. The not-in-labor-force (NILF) category increased faster (354K adjusted) than the decline in unemployed (274K), accompanied by a strong increase in the NILF category who want a job now (+108K, not adjusted). That unemployment rate of 5.5% isn’t as good as it looks, something the Fed members may have noticed too, even if the headline numbers are pretty loud.
The rest of the economy had less robust news. The ISM manufacturing survey eased to 52.9, while non-manufacturing stayed steady at 56.9. Both surveys had many members complaining about the port strike; I don’t consider the numbers to be especially significant of anything but weather and inventory management. Regional manufacturing surveys, apart from Dallas (taking an oil hit), have shown the same moderation in survey results. Factory orders fell for the sixth month in a row in January, this time by 0.2%, with weak energy prices playing the lead role. January shipments were weak, getting first-quarter GDP off to a weak start.
Construction spending fell 1.1% in January, taking the year-on-year rate to 1.8%. Monthly construction numbers are subject to substantial revisions, but that year-on-year rate has been in steady decline. The Fed’s Beige Book didn’t reveal anything in the way of a trend change, but one bright spot was Redbook’s February sales reporting, pointing to a good gain for Thursday’s retail sales report. Will that be more bad news for the market? Stay tuned.