Equities markets fell sharply last week, as key economic data continued to disappoint. The Dow closed lower on 4 of the 5 trading days, losing 2.9% cumulatively, while a similar performance for the Nasdaq and S&P 500 resulted in nearly 4% declines apiece. However, across the risk spectrum, losses were not nearly as uniform.
Among other riskier assets, crude oil enjoyed gains on the week, largely resulting from speculation on Friday that Tropical Storm Alex will disrupt drilling in the Gulf region. The euro and the British pound were both net winners on the week, despite a general tendency to fall alongside declining equities markets.
While performance across asset classes were mixed to negative last week, the economic data was extremely clear. The housing market is, indeed, in shambles, confirmed by two key measures in May: existing and new home sales. “Analysts” were way off target on both data points, though especially on the new homes front, where an annualized pace of 300,000 sales came in far below forecasts; it was, in fact, the worst annualized pace on record, dating all the way back to 1963.
The Federal Reserve added further concerns to an already fear-driven marketplace, as the FOMC issued an extremely negative statement on Thursday regarding the US and global economies. The numerous concerns that Fed cited are perhaps best summarized in the FOMC’s own words:
Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.
Looking ahead, investors can only hope that the recent onslaught of worrying economic data ends where this Friday’s jobs report begins. The Non-Farm Payrolls report will have its global audience on seat’s edge, following last month’s horrific employment data that, by any measure, fell far short of expectations.
The consensus estimate is for 108,000 jobs lost in June, with Census related terminations expected to number 243,000. Private payrolls, which is perhaps the only metric worth noting, are expected to have increased by 113,000, a far more somber expectation than that of May, when the private sector was expected to add 190,000 jobs. Of course, the May numbers fell wildly short of expectations, with the private sector adding a paltry 41,000 workers.
Investors can expect one of two possible outcomes from Friday’s jobs report. Should the data come in worse than expected, it will prove the final nail in the global economic coffin, amplifying negative sentiment, globally, and resulting in a panicked selling of riskier assets.
On the other hand, should the payroll numbers come in as expected, a short-lived, though much-needed, rally will ensue. Unfortunately, any rally will be extremely limited, as investors will quickly realize that 113,000 new jobs does not conform to the “V-shaped” recovery that “analysts” have been promising.
In my estimation, the consensus forecast continues to outpace reality. The private sector likely added between 55,000 and 75,000 workers in June, which would more closely match trends in jobless claims throughout the month. Moreover, global economic fears peaked at May’s end, likely resulting in a trimming of payrolls and deferred hiring decisions at the onset of June.
Whatever the final number, investors will have a clear measure for the health of the so-called global recovery and it will not come from corporate earnings. It's the jobs, stupid!
Disclosure: Author is Short KBH