Swing And A Miss.

My weekly market review 9/5/21


The eagerly awaited August job numbers on Friday morning were a mighty miss. June had seen 962,000 new jobs added, and July did even better with 1.05 million. In August, however, the pace of change slowed dramatically, with a gain of just 235,000 jobs vs. an expected number of around 750,000. The “reopening play” and growth-generating sectors of hospitality and leisure shockingly showed absolutely no job gains at all.

At the same time, average hourly earnings growth of 0.6% month-over-month (4.3% year-over-year) was higher than estimates of 0.4%. This is an inflationary concern for companies in need of workers.

I’m going break with convention to use most of this week’s Market Report on a kind of 101 and explain why these numbers are so crucial to your investments, because I think it’s important to grasp this right now ..

The Federal Reserve has two mandates; controlling inflation and optimizing employment. That’s pretty much it.

It has two main tools with which to achieve these mandates;

  • The ability to choose to purchase colossal amounts of securities (primarily bonds and bond funds) to inject “easy money” into the economy which finds its way into the wallets of consumers who then spend it on goods produced by corporate America, propping up the value of these companies

  • Raising or lowering the Fed Funds rate, which usually has a knock-on effect on all interest rates throughout the economy

It has previously pledged that it will not raise the Fed Funds rate until its current bond buying program was ended. It has also pledged to use its power to raise interest rates only when all three of the following conditions have been met;

#1: inflation goes above 2%,

#2: it seems clear that inflation will remain above 2% for an extended period of time

#3: full employment has been achieved. “Full employment” in this context does not mean that every single American has a job but the rather opaque definition that “the unemployment rate is low enough that workers can find jobs easily and earn steadily higher wages”.

So, #1 has definitely come to pass. It is becoming increasingly clear that #2 is pretty much in place. So the trajectory and timing of future interest rate changes is almost entirely tied up with #3. Jobs.

If you are still with me and following the thread here, you can see that the slowdown and eventual end of massive market-supporting bond purchases (Wall Street calls this “tapering”) is the opening act which needs to be completed and gotten off the stage before the main act of raising interest rates is unveiled.

So tapering is what comes next, and until the release of these numbers on Friday, conventional wisdom was that this process would probably start later this year, the smart money was on November. A few months of tapering and then the door would finally be open to raising that Fed Funds rate.

Only, more than half a million fewer new jobs than expected in August threw a wrench into this whole narrative. Clearly, the Delta variant is hobbling growth in the US economy, as particularly evidenced by those tell-tale numbers from the hospitality and leisure sectors. Condition #3 seems a long way off right now.

That means the Fed is now likely in much less of a hurry to raise interest rates and that means no rush to start getting the tapering done. And that means the continued main-lining of easy money into the economy and the maintenance of the proverbial stock market “punchbowl” for even longer. That is why the markets acted so calmly following the release of the numbers instead of having a freakout like you might expect after such bad news, because they were being pulled in two different directions.

Yes, there are some worrying diagnoses from the numbers. Not only is the recovery stalling due to a disease raging out of control in some parts of the country but at the same time the higher-than-expected wage growth spells future inflation. This spells “stagflation” (rising inflation with zero or negative growth) which is the market’s absolute Kryptonite. Yet these conditions also ensure the continuation of endorphins being pumped into the veins of the patient for longer than expected and that feels good.

I have diverged a little from my usual Market Review format to go somewhat deep into why this economic data is absolutely pivotal to what the stock markets are doing, but I’ll just finish up by saying that the “under the hood” divergences that I bang on about every week underwent some nice repair last week. Still no all clear, but things look much better than they did a week ago.


Relatively speaking .. 

- The tech-heavy NASDAQ-100 handily outperformed the S&P 500 again

- A second consecutive big week for Emerging Markets as the best performing region ahead of International Developed with US Markets bringing up the rear

- Large caps resumed their recent domination over Mid and Small 

- Growth stocks remained comfortably on top, outperforming Value stocks

- The week’s best performing US sector: Real Estate (two biggest holdings: American Tower, Prologis)

- The week’s worst performing US sector: Financials (two biggest holdings: Berkshire Hathaway, JP Morgan)

Technical corner 

- The proprietary Lowry's measure for US Market Buying Power fell 3 points while that of US Market Selling Pressure fell 1 point (both moving lower is indicative of how low trading volume has got in the last few weeks)

SPY, the S&P 500 ETF, is still comfortably above its 50-day and well ahead of its 200-day moving average. It ended the week a mere 0.04% off its all-time high 

QQQ, the NASDAQ-100 ETF, is still nicely above its 50-day and well ahead of its 200-day moving average. It ended the week at yet another new all-time high   

Each week I'll link to an interesting article I have come across during the week.

This week: We all know about melt-downs, what about melt-ups?

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