Bulls had been looking for a late-session Friday bounce, and that was exactly what happened after the early-session decline we saw following the dismal government jobs report. Friday’s afternoon rally was a great way to end the session positive, but it was not enough to get the major indices in positive territory for the week. It was not all that bad of a week, though, and when the closing bell rang Friday on Wall Street. The major indices had notched weekly losses of 0.2% for the Dow, 0.8% for the Nasdaq and 0.4% for the S&P 500. It was a moderately lower week, but it still disappointed the bullish camp that was looking for a lift.
The big disappointment came in the employment arena, which began with ADP’s weak private sector jobs report for April that showed just 156,000 new jobs; down from March’s 194,000. The ADP number set the stage for Friday’s slide in the government jobs report to just 160,000 versus the 203,000 that economists had expected. The government jobs report was also significantly down from March’s 208,000, and it threw water on any hopes that a real recovery was underway. Jobs reports are primarily a “lagging” indicator of the economy, and both the ADP report and the government report showed that all is not well in the U.S. economy.
The weak jobs numbers only added to that concern about a slowdown in global GDP, and also confirmed the recent ugly-looking numbers we have seen in U.S. GDP, consumer confidence, and retail sales. Even the “bulletproof” U.S. housing market was beginning to show signs of weakness in “red-hot” areas like San Francisco and the Silicon Valley, where tech stocks like Apple (AAPL) and venture capital startups remain under a lot of pressure. The overall picture for the U.S. economy is simply not as bright as we had thought following the big rebound in the stock market that we had seen since the late-February lows.
There was also a lot of concern this week following the weak manufacturing data we saw from China. China’s bad numbers set the stage early in the week that the global economy might be in a dangerous place, and the earnings and economic numbers in the U.S. that followed only reaffirmed that we might not be in the “best of times” right now. This is good-news and bad-news, in that a weakening economy all but ends the possibility of Federal Reserve rate hikes until early 2017, but at the same time, these numbers could foreshadow the beginnings of a longer-term build toward a recession. Investors love the thought of more QE and no rate hikes, but they get nervous at the thought of a global recession.
There were still a few Fed Heads hinting at a possible June rate hike, but after Friday’s employment report, all bets are off on a June rate hike. Even Bill Gross was out there early in the week commenting that more massive QE was likely on the way within a year since that is all that the central banks can do right now with interest rates essentially at zero (ZIRP), or in many countries negative (NIRP). Gross used the famous comment about dropping money from helicopters, and that is exactly what the central banks will likely do (at least electronically). This has tended to help the stock markets of the world, and with so many of them flat or faltering, we can likely look for more global QE coming soon.
There were some big hedge fund pow-wows this week, and the buzz from many “pros” was that the zero or negative interest rate policies might actually be deflationary and might be hurting the global economy. DoubleLine’s Jeff Gundlach had the great quote this past week that “if lowering rates will create problems, and raising rates will create problems, then we have a REAL problem.” Central banks have done everything they could do over the last seven or eight years, but they are out of ammunition, AND the central banks are losing credibility and trust from investors and financial markets. Where this all leads is anyone’s guess, but there is no getting around the fact that earnings are weak and economic numbers are fading fast.
Throw into this scenario a crazy Presidential race that has seemingly narrowed down to Hillary Clinton and Donald Trump, and we have the makings for the possibility of a roller-coaster summer in terms of politics and the financial markets. We all recall the election cycle of 2008 that brought financial collapse in October of 2008 when Lehman Brothers imploded, and some strategists are drawing parallels to our current 2016 landscape. There are similarities right now to 2008, so we will just have to wait and see what unfolds. We have an angry electorate that has propelled the likes of Bernie Sanders and Donald Trump into prominence, so it guarantees to be a wild summer in the political sphere.
The stock market has pulled back a bit from its recent highs, but it is still relatively flat for the year. That is a positive, but it is also a negative. It means confidence is just not there, and when we throw in the weak economic numbers, potential “global shocks,” and political uncertainty, any sort of bullish optimism might remain on the back burner. That said, the Gorilla wishes each and all a relaxing May weekend away from financial markets and the political news cycle. We have summer on the way, so it is a great time to get outside and enjoy the weather. We will be back in action on Monday, so again, a great weekend to all!
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