Stocks jumped to a new all-time high this morning following slightly better than expected weekly jobless data. First-time unemployment filings tallied 340,000 for the week ending August 28th, beating the consensus estimate of 345,000 by a slim margin.
Apparently, that’s all it takes these days to nudge the market higher. Some analysts called it an overreaction, but really, it had less to do with the actual jobless claims than it did the upcoming August jobs report.
“With jobless claims hitting a pandemic low, there’s definitely some optimism as we look ahead to the full jobs picture tomorrow,” explained Mike Loewengart, managing director of investment strategy at E-Trade.
“We could experience a bit of a tug and a pull — on one hand a solid jobs report is a positive indication of economic recovery, and on the other it backs up the Fed’s case to begin tapering.”
“The private payrolls numbers have been all over the map during the pandemic,” he added.
“But with so much pressure on improvement on the labor market front coming from the Fed, this could send a signal that jobs growth is stagnating. That’s likely a good thing for the markets, though, as it means easy money policy continues.”
Alternatively, a bad jobs report could put the Fed in a tough situation as “stickier” sources of inflation – home values, rents – continue to rise. ADP’s private payroll data suggests that a major “miss” is coming (374,000 jobs reported vs. 638,000 expected).
If that’s the case, the bull market may react poorly when investors realize that the US could be headed for “stagflation” by year’s end.
An ideal August jobs report would be “not too hot, not too cold,” complete with a strong payrolls number that falls somewhere near the consensus estimate. The July jobs report provided this in early August and helped the bull market rip to new heights in the weeks that followed.
Credit Suisse believes bulls will get a repeat performance, regardless of how US labor looked last month.
“The relentless march higher on low volatility in U.S. equities continues and with breadth, volume positioning and sentiment measures all positive in our view we look for the rally to extend further into new highs yet,” wrote Credit Suisse analysts in a note.
Elsewhere on Wall Street, banks have slashed their Q3 GDP forecasts. Goldman shocked investors two weeks ago when it cut its Q3 growth projection to 5.5%, down from the bank’s initial 8.5% estimate. Today, Morgan Stanley joined Goldman by slashing its own Q3 forecast as well.
Morgan Stanley now believes the US economy will only grow by 2.9% in Q3. Several weeks ago, the bank projected 6.5% quarterly growth by comparison.
If both Goldman and Morgan Stanley are correct, Q3 earnings could very easily dent market valuations. And though that may seem like bad news for investors, Morgan Stanley argues that Q4 would see a major rebound.
“We have anticipated slower growth in 2H21, but it has been greater-than-expected, concentrated in the third quarter. August is the month when we think broad activity slowed the most, which will be reflected in data reported throughout the month of September,” wrote analysts from the Wall Street bank.
“We expect momentum to then rise again heading into 4Q with a more supportive base effect.”
Ultimately, this could materialize into yet another significant buying opportunity for traders. The data could also hit when the market’s most vulnerable as the Fed contemplates tapering its monthly bond purchases.
So, even though stocks seem to be in a precarious spot at the moment, the truth is that bulls simply do not care. They assume that equities will never stop rising. Tomorrow’s jobs report release, weak or strong, is unlikely to matter two weeks from now as bulls attempt to push the broader indexes to higher highs.
Until, of course, the Fed spoils the party with a taper warning later this month. Or worse, an official taper announcement.