Mr. Market Battles a Case of the Blahs

Traders can be creatures of habit.  Even with a key set of economic reports due this morning, traders stuck to their now-familiar pattern of buying into weakness in pre-market US index futures in anticipation of an ensuing opening rally.  The tactic worked well for extended periods this year, which is why it is seemingly ingrained into traders’ behavior, but it has been anything but automatic recently.  A change in market psyche might be at work.

This morning’s data dump did not offer the clarity that many investors craved, especially because we received two months of employment data at once.  Nonfarm Payrolls rose by 64,000 in November, above the 50k consensus, but they fell by -105k in October, well below the -25k consensus.  This gave us a 3-month Average Change of 22k through November.  It’s hardly a robust statistic, but unlikely sufficiently bad enough to spur the FOMC into immediate action.  The Unemployment Rate rose to 4.6% from 4.5%.  That is clearly in the wrong direction, but Chair Powell cast doubt upon the statistics behind that calculation during his recent press conference:

… we’re going to need to be careful in assessing particularly the household survey data. There are very technical reasons about the way data are collected in some of these measures, both in, you know, inflation and in labor — in the labor market so that the data may be distorted. And not just sort of more volatile, but distorted. And that — it’s — and that’s really because data was not collected in October and half of November. So we’re going to get data, but we’re going to have to look at it carefully and with a somewhat skeptical eye by the time of the January meeting, notwithstanding that we will have a lot of the December data by the time of the January. So we expect to see a lot more, but I’m just saying that the — what we get for, for example, CPI or for the, you know, household survey, we’re gonna look — we’re going to look at that really carefully and understand that it may be distorted by very technical factors.

(I’ll spare you the technicalities, and instead guide the curious to a full explanation by the Bureau of Labor Statistics.  The short version is that the payrolls report utilizes the Current Employment Statistics (CES) survey, also known as the payroll or establishment survey, while the unemployment report uses the Current Population Survey (CPS), also known as the household survey.)

Thus, today’s numbers are in the “neither here nor there” region.  They’re not good enough to remove doubts about the overall health of the economy – especially when most components of this morning’s October Retail Sales report show strength that contrasts with sour sentiment surveys – but not dire enough to spur the Fed into action. 

It is difficult to know what to root for right now.  I believe that one should always root for solid economic numbers because a good economy powers the earnings and cash flows that truly bolster company valuations.  The current environment, however, means that unequivocally solid numbers are hard to come by.  We almost need a set of “reverse Goldilocks” reports – cool enough that central banks will be incentivized to cut rates but not so cold that they indicate an economic deep freeze. 

Hence, we find ourselves in a short-term bout of market malaise.  Traders were indeed pleased by the outcome of last week’s FOMC meeting and subsequent press conference, and we noted that they were justified in the positive response that pushed the S&P 500 (SPX) to a new closing high.  But since then, we have seen stocks falter on Friday, yesterday, and this morning.  Three down days is hardly cause for panic, but it does show that we also can’t take a market bounce for granted.  We need to learn about inflation during Thursday’s CPI report, get another read on sentiment from UMich on Friday, and deal with the year’s final quarterly expiration on that date as well.  Then we’ll see if that sets an adequate runway for the much-anticipated “Santa Claus Rally”.