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Wall Street Cheer a “Strong Jobs” Report… Should They?
Wall St. cheered a perceived ‘strong’ monthly June jobs report. The economy added 206K jobs last month – however the unemployment rate moved to 4.1% – its highest level in 2 years. Here’s the thing: there was a lot of weakness in the labor market – with most of the jobs coming from government. In addition, April’s job gains were revised lower by 111K. And May was revised lower by almost 60K. I think there is material underlying weakness (reflected in slower Real GDP and PCE) and perhaps enough for the Fed to start cutting rates in September or November.
Why ‘Soft Landings’ Deserve Scrutiny
What impact will a ‘soft-landing’ have on current stock valuations And does there need to be a recession to experience a meaningful (e.g. 12%+) decline? My short answer is no. The gist of this post is to remind investors that you don’t need a definitive line-of-sight to a potential recession before protecting gains. I say that because recessions are lagging events – which come at the very end of the cycle. By the time they arrive – the economic damage is already done. Therefore, we need to be in front of the curve. Typically in the 9-months leading up to a recession – stocks continue to trade at or near highs – as analysts raise their outlooks. Unemployment and earnings are usually strong – as GDP keeps its head above zero. But those who are able to understand where we are in the business cycle will pay careful attention to what’s happening shortly after peak economic growth.
What Does Kolanovic See That Others Don’t?
Most analyst year-end S&P 500 targets range from 4200 to 5600 for equities; and 3.00% to 4.75% for 10-year yields. My guess is we will land somewhere in between these zones. On the whole, it’s fair to suggest Wall Street feels ‘comfortable’ with holding equities. Consensus year end targets average 5400 – which tells me most don’t expect stocks to do much between now and year’s end. More important – they don’t expect stocks to lose any ground. This post expands what I think is the single most important variable (and risk) with these forecasts: the relative health of the US consumer and their ability to continue spending.
Swoooosh
Is the market overconfident? Does it only see upside? What weight does it assign to the risks? And are the ‘sirens’ of perpetually higher prices too hard to ignore? One popular measure of confidence is the weekly AAII Investor Sentiment Survey. As at June 26th – 44.5% of all investors lean bullish – up from 39.0% June 5th. Analysts have also been busy hiking their S&P 500 targets for year end – with the average now around 5400. But not all analysts are aligned. Separately, we look at the record 20% one-day decline in Nike… they are warning of sales declines next year. Is this a great long-term (3-year) opportunity; or a signal to stay clear?