This week's calendar includes a pretty normal schedule, but not the most important economic reports. There will be an abundance of FedSpeak, with questions about last Friday's employment data. Despite this, the real story will be the start of earnings season. Expectations are pretty low. Statements about the outlook are always important, but that is especially true right now. The financial media will be asking: Can the profit outlook sustain the rally in stocks?
Last Week
The economic news was pretty good, and the market reaction was even stronger. The continuing market rebound has caught many off base. This week's review emphasizes Friday's employment report, since that was the biggest news.
Theme Recap
In my last WTWA, I predicted that the post-Brexit rally might continue if the economic news was good. This could lead to discussion of a possible “summer rally.” After a poor start to the week, the economic data finally turned the trick. From my “final thought” from last week:
Rightly or wrongly, much will depend on the employment report. The economy is the key to future earnings. Recession odds are low, earnings are improving, the oil issue has stabilized, and the Fed is on hold.
In addition to summer rally discussions, there was continuing skepticism – sucker's rally, bull trap, and similar terms were bandied about. Sometimes I am right about the theme, but incorrect in my expectations. Last week both were on target.
The Story in One Chart
I always start my personal review of the week by looking at the great chart from Doug Short that summarizes the week. Since that post has not yet been updated this week, here is the picture from CNN Money. It was a pretty quiet week until the big Friday rally.
The News
Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something really good. My working definition of “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too.
The Good
Las Vegas real estate sales are improving, up 7.1% year-over-year. Calculated Risk notes:
This is a key distressed market to follow since Las Vegas has seen the largest price decline of any of the Case-Shiller composite 20 cities.
Long-leading indicators have improved. New Deal Democrat has a mid-year summary of ten indicators with demonstrated lead times. This is well worth a look. One nugget among the many good ideas:
The yield curve remains as positive even now, with the same slope as it had in the middle of the 1970s, 80s, and 90s expansions. The 5-year spread is even wider than it was during most of the 1960s.
Employment news was good. We should follow multiple sources on employment, especially because of the volatility and revisions in the “official” data. This week the news was all good, but perhaps not as good as the initial market reaction would suggest.
- The ADP reported a gain of 172K private jobs, beating expectations of 152K. This is an important independent source.
- Initial jobless claims hit a new low at 254K, beating expectations by 14,000.
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Non-farm payrolls recorded a stunning net gain of 287K, exactly the opposite of last month's result of 11K after revisions. This was good news, but not as good as it seemed. It requires a deeper look.
- Commentary varied widely. For details, check out the summaries at Bloomberg and The Wall Street Journal. The bearish pundits either denied the strength, said that the market was not prepared for a rate increase, or both. Bullish commentators saw Santa in July, a reassuring number that would not cause the Fed to react.
- Many fine sources showed balance. This report was not as good as it seemed, nor was last month's so bad.
- The charts are always interesting. Here are some of the most important from The WSJ and Bob Dieli's monthly employment report (subscription required). To summarize from the WSJ, the change in earnings growth is still disappointing; most net job creation is full-time, the number of those wanting but not getting full-time jobs has declined significantly. From Dr. Dieli, the overall path of growth is the main theme. The duration of unemployment is an important and often-neglected story. Both sources have many more helpful charts and plenty of analysis.
