There was investor optimism going into Friday’s jobs report that we would get a strong employment report which would confirm that the economy was vibrant and that better days were on the way. After all, we have heard various optimistic Fed Heads hinting strongly that a June interest rate hike was on the way, and the rationale was that an improving economy easily supported such a move. The Fed had said it would remain “data driven,” and while recent economic data has been good, it has not been all that great. Recent economic news has been mixed, so that put a lot of pressure on Friday’s government jobs report.
What we saw on Friday was a big decline in monthly job creation to a mere 38,000 jobs versus the expected 155,000, and it was definitely not the sort of “data” that the Federal Reserve needed to justify a June rate hike. It was the weakest employment growth we have seen in more than five years, and it led to Friday’s moderately lower, lackluster close. For the week, the major indices were mixed, with a 0.4% weekly decline for the Dow, a 0.2% gain for the Nasdaq and an essentially flat close for the S&P 500. It was a somber week for a stock market that had been looking strong from a technical standpoint.
Bulls were particularly disappointed to see the S&P 500 close at 2,099.13, just a whisker below the 2,100 level that bullish technicians were hoping would turn into a new level of support. One down day does not make for a new trend, but with the employment numbers looking so weak, it is hard to make the case that the economy is anywhere near an expansionary mode. There was even a downward revision of April’s jobs numbers to 123,000, which just added to the downbeat vibe in the stock market to close out the week.
What Friday’s employment report did, however, is that it not only makes a June rate hike impossible, but it also makes a Fed rate hike for at least the rest of the year highly unlikely. Historically, the stock market rallies at the thought of no rate hikes, but what does the stock market do when “near-zero” interest rates are already in place while you have a cratering U.S. economy? We all recall the “upgrade” of first quarter GDP from 0.5% to 0.8% last week, but when you combine sub-1% GDP with 38,000 new jobs in May, the economy seems a lot more likely to head toward recession than to suddenly boom again.
Throw in the ongoing political uncertainty with regard to the Presidential election, and it might be difficult for the stock market to find any sort of catalyst that would help it head higher. The California primary is Tuesday, and while Trump will likely win for Republicans, the Clinton-Sanders race is still too close to call. Politics usually do not spook the stock market, but this particular election is different. There is enough uncertainty emerging that we actually COULD see this summer’s election cycle create enough uncertainty to make the financial markets nervous. Just look back to the summer of 2008 for a historical point of reference for what COULD go wrong.
Look for the Federal Reserve to be out in force in the weeks ahead, mainly because it does not like to be perceived as “behind the curve.” All of that talk about rate hikes in June has been “egg on the face” for Janet Yellen and the Fed. The Fed has every right to pursue its policies, but it has to remain cautious in hinting too much and sticking its neck out too far. Many Fed critics have already said that the U.S. Fed, and global central banks in general, have been losing trust in recent years, so seeing a backpedal on a June rate hike will only increase this distrust among the investor class. Again, it will be interesting to see what sort of comments we see next week.
That said, the Gorilla wishes each and all a relaxing June weekend away from what continues to be a very tough year for the stock market. Earnings have been mixed, economic numbers have been mixed and the broader stock market has been mixed. Politics are probably as mixed and confusing as we have seen in years, so let’s enjoy this calm, pre-summer time. We will be back in action on Monday, so stay tuned as we head toward what could be a roller-coaster summer for the stock market. Again, a happy June weekend to all!
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