Investors have very short memories.
Today’s U.S. Nonfarm Payroll Report was a huge disappointment by any measure. Paraphrasing some reaction to it (mostly from economists who got it wrong):
- Severely disappointing.
- No redeeming qualities whatsoever.
- Stop looking for the silver lining. There is none.
Now most of you know that I have a fairly bearish view on the economy due to the global debt burden. So I’m doing an I-told-you-so happy dance right now, right? Not so much. While I did add to my tiny HIX position today, I’ll be out of it again quickly if the market changes its mind, as it’s wont to do regularly.
Attention Deficit and Hyperbole
Why so sanguine in the face of data that is, by all accounts, unexpectedly and extremely negative? Because years of following the markets have taught me two key things:
- Markets have a very short memory.
- Anything can happen.
It’s not wise to cling to a single idea, data point, or theme. The markets are full of too many variables for that kind of strategy to be successful. Markets, and the traders who drive prices, tend to be prone to both hyperbole and attention deficit disorder. The news of the moment is often blown out of proportion – until the news of the next moment takes over. How many times have we seen a premarket bomb turn into an afternoon delight?
ADP vs. BLS
Markets jumped on Thursday due to a better than expected employment report out of ADP. Many economists raised their estimates for today’s BLS report as a result of that report. Obviously, the BLS report looks that much more disappointing in light of those elevated expectations.
ADP is slammed regularly for missing the BLS nonfarm payroll number, sometimes by a wide margin. To me, this misses the point. It seems like it might be more productive to ask which report is more accurate. What if the ADP report is actually presenting a more accurate view of the U.S. employment picture? I’m not sure whether that’s the case or not, but I’d love to know the answer.
Potentially Positive Catalysts
So what are some of the catalysts that could trigger my stop? Any of the following could cause an upward mood swing for traders:
- The ADP number could be catching an uptick in employment before the BLS. Future economic data may look better.
- While many other data points have been negative, there have also been some positives: rail traffic has increased in both the U.S. and Canada, corporate earnings have been rising, and retail sales recently beat expectations.
- Those who say the recent soft patch is mainly due to the supply chain disruptions caused by the Japanese disaster may turn out to be correct.
- Earnings season is upon us. We may see some upside surprises. (For a much more cynical take on earnings beats, take a look at the latest note from Albert Edwards via Zero Hedge.)
- If the data continues to be negative, we could see another Jackson Hole miracle toward the end of the summer as Bernanke dangles the QE3 carrot and causes another short squeeze/asset price liftoff.
- The U.S. government comes to an agreement on the debt ceiling. While this wouldn’t solve the long-term debt problems facing our neighbours to the south, it would likely provide some support to the markets.
If I sat here a little longer, I could probably come up with a few more ideas. And there are always those white swans to consider too. You never know when some completely unanticipated event will move markets one way or the other. In the end, none of us knows what will happen next. Even if we have some insightful hypotheses, they may not play out according to the timeline in our heads. Best to remember that anything can happen.
By the way, I could come up with an equally long list of negative catalysts, but I’ll leave that for another time. For now, I see the NFP number as concerning, but not necessarily catastrophic. I would be much more concerned if things started to unravel on the European sovereign debt front, or if more rumblings of trouble with Chinese debt began to surface.