For investors, it should be viewed as a bit worrisome any time negative economic data reports are used as the basis for a bullish argument in the stock market. But this appears to be precisely what is happening with the U.S. economy adding only 75,000 new jobs during the month of May. Since the final days of December 2018, the SPDR S&P 500 Trust (NYSEARCA: SPY) has generated gains of 23.33% and these types of performances are well above the market’s historical averages. Essentially, there appears to be no lack of joy and enthusiasm visible in the financial markets. However, outflow activity visible in the SPY ETF already shows that investors have started running for the exits as key stock components within the fund look vulnerable in recent earnings performances. Overall, this suggests the bull rally is trading on "borrowed time" and this should make further gains in SPY exceedingly difficult to accomplish during the next 1-3 months.
(Source: Author, TradingView)
Ultimately, nothing is more important than the macroeconomic data and many analysts will agree that new hiring in the labor market represents the most critical element of all. On the positive side, the U.S. unemployment rate remains incredibly low (at 3.6%). But the most recent U.S. nonfarm payrolls release came in well below the market’s expectations (analysts were calling for jobs gains of 185,000) and downside revisions were made to the March/April figures (with cumulative reductions of -75,000). In January, the three-month moving average for the U.S. nonfarm payrolls report indicated stable monthly jobs additions of 245,000. After the May figures, this moving average has dropped to 151,000. Unfortunately, this release cannot be viewed as an isolated incident, as the nonfarm payrolls release follows the weakest ADP employment report in roughly nine years.
The May figures from ADP (which measure employment gains in the private sector) rose by just 27,000. As a result, Wall Street analysts have raised expectations for a rate cut from the Federal Reserve as a way to limit the negative effects of an extended U.S. - China trade war and counteract weak trends in consumer inflation. According to data compiled by CME Group, the market is currently pricing in a +25% possibility that the Fed will reduce rates at its June 18-19 monetary policy meeting.
Last week, the major benchmarks posted their best weekly performances since last November in spite of the fact that companies with substantial sales outside the U.S. could see earnings declines of nearly -10% during the second-quarter period. All of this suggests that the bull rally in equities is trading on borrowed time with only the prospect of lower interest rates keeping valuations afloat.
Added potential for trend changes have become apparent in the long-term fund flows visible in the SPDR S&P 500 Trust. Over the last 13-week period, the ETF has been negatively impacted by outflows of ‑$5,074.8 million. This is problematic on its own, as this activity puts the fund at the bottom end of its category averages. But these numbers swell to ‑$9,553.9 over the most recent 26-week period and ‑$13,392.0 million over the last full-year period. Thus, it may not be surprising to see that these figures place SPY at the bottom end of its category averages on an extended time frame.
Key stocks within the fund have also shown evidence of coming weakness. During the most recent reporting period, Exxon Mobil (NYSE: XOM) released profit figures that indicated declines of almost 50% on an annualized basis. Shares of XOM represent a top-ten SPY holding (accounting for 1.33% of the total ETF valuation). As a leading example of the energy sector, potential trend changes in Exxon’s earnings results should be viewed as a critical indicator of things to come.
For the period, Exxon reported earnings of $0.55 per share, against expectations of $0.70 per share. The company’s chemicals and refining segments were areas of obvious weakness. Quarterly performances showed losses from Exxon’s downstream business, which refines its oil products into diesel and gasoline fuels. Large gasoline stockpiles reduced fuel margins and Exxon continues to face significant maintenance costs in repairing its refinery infrastructure. These are issues that have been ongoing for Exxon over the last few quarters and the company has explained that this is likely to continue into the next reporting period.
For the quarter, Exxon reported total earnings of $2.35 billion (which represents a decline of -49.46% from the $4.65 billion reported during the same period last year). Exxon’s revenue figure came in at $63.63 billion (which indicates a -6.7% decline on an annualized basis). This was lower than the consensus estimates (which called for $64.82 billion in revenue) and the company absorbed an increase in capital/exploration expenses of $2.09 billion during the period. With a declining earnings outlook, shares of XOM are trading on a precarious footing with problematic signals being sent for the energy sector.
As leading components in the ETF may continue to show vulnerabilities from an earnings standpoint, market trends suggest the SPY bull rally is likely trading on borrowed time. Only the prospect of lower interest rates seems to be keeping valuations afloat and this should send cautionary signals for investors. Since the end of December 2018, the SPDR S&P 500 Trust has gained 23.33%, but these types of gains have risen far above the historical averages. Investor outflow activity visible within the fund shows that investors are already running for the exits and the broader environment suggests that it may be time to start taking profits on remaining positions.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.