Yahoo Sports Stock market bulls could be clobbered if the March employment report disappoints
Traders enter April with fat heads, full stomachs and a spring in their steps. That’s the kind of setup that could lead to good old fashioned clobbering, especially if the March employment report stinks like February’s surprising dud.
Despite a lack of a U.S. trade compromise with China, global macroeconomic data surprising to the downside, a worrisome yield curve inversion and earnings warnings from relevant companies such as FedEx (FDX), the S&P 500 notched a sweet 12.9% gain in the first quarter. The showing — mostly fueled by the Federal Reserve promising cheap money for longer —marks the best since 1998.
Meanwhile, European stocks gained 12% even in the face of a downturn in economic conditions.
Stocks received a boost late in the quarter from very well received IPOs from Levi’s and Lyft. The first day of trading in the second quarter begins with the S&P 500 only off 4% or so from its all-time high. Meanwhile, Dow component Apple (AAPL) is up 20% this year even as its CEO Tim Cook put most bulls to sleep at the unveiling party for a new streaming service last week.
What all the bulls have apparently forgotten is that the 2019 economy — specifically the labor market — is shaping up to be much different than 2018. A reminder (and a potentially painful reminder) on how different will arrive on Friday with the March employment report.
A slowing job market
Most on Wall Street quickly disregarded the meager 20,000 increase in February headline employment due to inclement weather. Hence, the consensus for March calls for a nice bounce-back to 190,000 jobs created. A bounce should be expected given solid reads in various U.S. manufacturing surveys, better weather and low unemployment claims.
But the number when taken with February’s would represent a sharp slowdown from the 220,000 average gains in jobs achieved last year. Blame the U.S.-China trade war or a fresh economic slowdown in Europe, whatever — a cooling labor market is a new factor investors didn’t have to deal with last year. In this type of environment, companies often don’t grow profits as quickly and downside risk to their financial outlooks usually trump upside potential.
A slowing U.S. jobs market is also a factor being ignored by a consensus more inclined to trade promises of continued Fed dovishness with the addition of new long positions than dialing back risk amid a U.S. economy shifting down a gear or two.
“With the manufacturing sector set to slow further, as weaker growth in China and Europe begins to weigh more heavily, manufacturing payroll growth is likely to remain subdued over the coming months. More worryingly, there are signs that weaker domestic demand is feeding through to a slowdown in hiring in the much larger services sector,” cautions strategists at Capital Economics. The research shop estimates a 150,000 increase in March employment.
One strategist flat out says the latest push higher for stocks is rather unwarranted.
“While we have felt that the markets over-reacted to the fear of an ‘imminent’ recession last quarter, the S&P 500 has rallied without much support from economic data, earnings or fund flows. Indeed, during 1Q19, EPS estimates for S&P 500 companies were cut by 7.2% - the most since 1Q16 led unsurprisingly by energy, then materials and IT,” notes Jefferies chief global equity strategist Sean Darby.
Further, remember the Federal Reserve is weeks removed from reducing their GDP estimates for this year and 2020. What do they know that the investors don’t (probably a lot)?
The Fed ‘is clearly concerned’
“I don’t want to overdue my judgement based on the first quarter, but our own view at the Dallas Fed is that if we grew close to 3% last year we will grow something more in the range of a little bit less than 2% in 2019. We can still grow at a reasonable rate but it will be lower than 2018 — the issue right now is that there is a lot of downside risk and uncertainties around that 2% forecast,” Dallas Fed president Robert Kaplan told Yahoo Finance.
Sure doesn’t sound like firm ground for another 12.9% gain in the S&P 500 in the second quarter.
Thanks to the Fed, investors have the mindset currently that bad economic data ratchets up the chances for an interest rate cut. That’s a dangerous game to be playing at more inflated valuation levels for stocks relative to January.
Reminds Bank of America Merrill Lynch U.S. economist Michelle Meyer, “The Fed is clearly concerned about the fact that they will be low on ammunition to fight the next recession. This means that they need to be careful not to waste their limited bullets.”
So, if you are all bulled up on stocks right now, hope for a 200,000 headline jobs increase as it would be better than expected and not too hot to back the Fed off from its dovishness.
But be prepared for a sub-200,000 gain due to all the so-so reads on the global economy lately and that only fueling renewed fears of a recession. And subsequently, be ready to downgrade that optimism you rode to big gains in the first quarter.
It’s the reality, people.
Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi
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