Jobs Report Versus Trump Jawboning for S&P 500 Record Highs

Jobs Report Versus Trump Jawboning for S&P 500 Record Highs

The markets are advancing to record highs against a backdrop of threats fading rather than a foundation of growth that matches the enthusiasm. Will Trump’s jawboning and seasonal conditions carry the market forward?

 

Talking Points:

• Liquidity is a top consideration for market activity over the coming week with the US Independence Day holiday carrying heavy expectations
• Systemic themes like war in the Middle East, trade wars and monetary policy fights have come and gone with the markets growing increasingly unperturbable
• Top event risk of US nonfarm payrolls (NFPs) may dominate financial headlines, but a thinned market may significantly curb a market reaction

S&P 500 At Record Highs but the Fundamentals are Far Less Impressive

It is easy to ignore market conditions when benchmarks of risk appetite are pushing record highs. Complacency is one of the strongest drugs in the capital markets for investors. However, a little diligence never harmed anyone. Looking into the new trading week, there are a lot of assumptions at play. On the one hand, we have the technical backdrop of exceptional highs for key gauges of confidence like the S&P 500 or Nasdaq 100. There isn’t a universality of record highs for everything that aligns to the spectrum of return and risk, but the pacesetters are certainly setting a tone.

Chart of Risk Spectrum Standing

   

Source: John Kicklighter

 

Seasonality Will Carry Significant Expectations in this Environment

Readily feeding heavily into assumptions, on the quantitative side, we have a very heavy seasonality draw. Historically, the 27th week of the year – the period for which the US Independence holiday typically falls – represents among the lowest volatility weeks of the year and the best overall performance for the S&P 500 averaged out over the past century. As it is said, ‘past performance does not guarantee future results’; but that is remarkable norm. Activity, through volume and volatility, will be particularly difficult to deviate from that norm. On the other hand, directionality is far more uncertain.

Chart of S&P 500 Average Weekly Performance and Volume Over the Past Century

  

Source: John Kicklighter, Standard & Poor’s

 

A Dense Calendar but Not Much Runway for Stand Outs

There is a conflict to the economic docket over the coming week. On the one hand, we have a well-stocked calendar of meaningful event risks – tangible data points on series that are no stranger to taking over financial headlines. On the other, we have seen a market backdrop where fundamental developments are downplayed, whether they could leverage enthusiasm or be seen to spark fear, and with further consideration that conditions seem to be lining up to the seasonal norms.

That creates a scenario where the expectations for this mid-year period (the 27th week of the year) will generally conform to the historical norms in participation, volatility and performance that we have seen average out to a bullish lean over the past 100 years for the S&P 500. Of course, averages have extremes; so it would be foolhardy to write off a risk off development – much less targeted volatility for a particular region or asset that digests a significant event risk – but we should adapt our expectations for scenarios to account for the higher threshold of outcomes necessary for major moves.

Calendar of Top Global Macro Event Risk

  

Source: John Kicklighter

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China’s Economic Health Is a Macro Priority

Knowing that the US will be the source of a significant liquidity drain around the half-week mark even though our attention will be pulled later into he week due to key event risk like the June nonfarm payrolls, I will be looking to other key countries’ economic dockets for event risk that could significantly sway the global tides. One event that stands out as a distinct and significant update is the June activity PMIs (general, manufacturing and services) from China. The figures due Monday are from the government, so they are as close to an official economic update as we get relative to the lagging quarterly GDP readings.

That said, the source continues to be met with a degree of skepticism by the global market. That said, the assumption of window dressing on the data translates into a greater degree of surprise should the data meaningfully disappoint. That is a low probability, but it is a much greater potentiality in regards to impact. Alternatively, an improvement is readily overlooked.

Chart of PMIs as a Proxy for GDP (Monthly)

   

Source: John Kicklighter, Stand & Poor’s

 

How Far Will the Tariff Shock of April Stretch?

Considering that President Trump made a statement Friday afternoon suggesting trade negotiations with Canada were suddenly called off and that a tariff rate would be dictated on the country within seven days, it is worth monitoring the tangible health readings for major US trade partners via their timely manufacturing activity and business confidence reports. Aside from the aforementioned Chinese factory report, we have a Japanese 2Q Tankan manufacturing report and Mexican manufacturing PMI on Tuesday as well as a Canadian manufacturing report on Wednesday.

There are other countries issuing their own factory reports that aren’t at the forefront of the USTR’s ire as well as a host of business confidence surveys due through the week. It would be more impactful if they uniformly reflected strain or an anti-US bent, but it is more likely to be a mix which will restrict any volatility to a localized effect. Meanwhile, the US ISM manufacturing report will give a status update for America’s industry, which could very readily spark US and global volatility should it offer any significant contractions – again a low probability but high potential.

Chart of the US ISM Manufacturing Report and Components with S&P 500 (Monthly)

   

Source: John Kicklighter, ISM Manufacturing Report

 

The US Jobs Figure ‘Matters’ But Its Market Impact Will Struggle

Finally, there will be heavy discussion around Thursday’s – a rare time when it isn’t a Friday release – June nonfarm payrolls (NFPs) release. Given the focus on economic health and monetary policy in the United States, this a natural beacon for financial commentary, but the potential impact for the market is severely impacted by the liquidity conditions. With US markets offline Friday and the world growing numb to dramatic headlines owing to their progressively diminishing market control, there will be a particularly high barrier for this data suite to urge a substantial market movement.

That is not to mean that the labor data doesn’t matter. Quite the opposite. If payrolls drop and/or the jobless rate rise, it will add fuel to the fire of President Trump’s demanding central bank action. Rather, the bulk of the impact will play out after liquidity return and it will be less intense and more integrated into trend rather than abrupt repricing. The same is also true of the other data on tap Thursday like the ISM service sector report and May trade balance figure.

Chart of Monthly Change in US Payrolls and Consecutive Months of Growth/Contraction

  

Source: John Kicklighter, US Bureau of Labor Statistics

 

 

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--- Written by John Kicklighter, Global Head of Content