Can stocks continue their post-payrolls bounce?
U.S. equities bounced higher on Friday in typical post-payrolls fashion after a weaker-than-expected employment report culled odds of a Federal Reserve interest rate hike this year. As has been the tendency lately, no matter how the number came it, it was spun as a positive.
As a result, the Nasdaq Composite (I: COMP) pushed back to levels not seen since Aug. 23 and is threatening a breakout to new highs.
With the summertime doldrums set to end as Labor Day marks the end of one of the quietest periods in market history, can the bounce continue?
History suggests the end of September could be rocky. Jason Geopfert at SentimenTrader noted that when stocks have rallied to within 0.5 percent of a record in the wake of a weak jobs report -- as they have 17 times since 1998 -- the market has tended to give way to a bout of weakness. The most consistent performance going forward was a 1.6 percent after drop 26 days later (with a positive return three times and a negative return 14 times).
This time could be different, however.
Nonfarm payrolls increased 151,000 in August, below the 180,000 gain that was expected. Seasonality may be a factor, as August has been a weak month in recent years. But the result was still a shock after strong job gains in June and July (the three-month average stands at 232,000). Moreover, the unemployment rate was unchanged at 4.9 percent vs. the drop to 4.8 percent that was expected.
Philippa Dunne of the Liscio Report called the report “soggy” and a disappointment in “almost every aspect.” As a result, the futures market gives odds of a September rate hike at 21 percent, down from 24 percent, while the odds of a December hike fell from 42 percent to 41 percent.
These are probably still too high in her estimation, with “no sign of wage pressure, and with the forward-looking components of the report (like temp employment and the workweek) not forecasting any pickup, we’d say the chances are closer to zero, especially with the election looming.”
The jobs result caps the worst two weeks for the Bloomberg U.S. Macroeconomic Surprise Index in the last six months, which measures where the data is coming in relative to expectations. It comes amid a steady markdown in 2016 U.S. GDP growth expectations. And it comes amid an ongoing corporate earnings recession.
While some Fed officials have been sounding a hawkish note lately, the evidence is overwhelmingly in favor of a continued pause in the rate hike cycle.
Especially with the upcoming presidential election and the Fed’s tendency to go quiet ahead amid presidential campaigns. And that could be the catalyst the bulls need to restart the market uptrend that stalled in July.