- 15 of 19 past Augusts have seen payrolls trailing estimates
- S&P 500 in 1.5% range for 36 days, tightest trading since 1964
If you’re a trader who’s been fed up with U.S. stocks doing nothing for weeks, Friday’s payrolls report may be the solution.
In short, August employment reports are usually bad, and that’s normally bad news for equities. Since 1996, 15 out of 19 releases have trailed economists’ estimates, data compiled by Bloomberg show. When they did, the S&P 500 Index fell an average 0.4 percent, compared with an average increase of 0.1 percent for all payrolls days.
While a shortfall this time could be framed as bullish, prompting the Federal Reserve to hold off raising interest rates in September, weakness would also undermine confidence that a second-half pickup will stem a decline in corporate profits. The S&P 500 slipped less than a point to 2,170.86 at 4 p.m. in New York, squarely within the same 1.5 percent band it has now occupied for 36 straight days. That’s the tightest trading range since 1964.
“When the market moves within a narrow range, it’s getting tightly wound and looking for news, and Friday’s number is a big number,” said Joseph Veranth, chief investment officer at Dana Investment Advisors in Brookfield, Wisconsin, which manages $7.4 billion. “Because there is a lot of optimism built in, it’s going to be a show-me market.”
American companies are forecast to have added 180,000 jobs last month, an increase that if matched would be the best initial reading for any August since 1998. The odds of that happening aren’t promising: August ranks No. 1 among all calendar months for the frequency of disappointments. On average, it produced 36,000 fewer jobs than economists predicted in the last two decades.
Disappointing jobs data hasn’t boded well for stock returns historically. Since 1996, the S&P 500 is flat on average for the days when payrolls reports trail estimates, compared with a 0.3 percent gain when they beat. The performance gap is more pronounced for August, where miss days saw the equity benchmark falling 0.4 percent versus a 1.2 percent advance for positive surprises.
Momentum is already fading in U.S. stocks after a rally added almost $4 trillion to U.S. equity values from the February bottom. Since a slew of all-time highs ended a 14-month drought in mid July, the S&P 500 has been stuck in neutral amid mixed economic reports and speculation over the timing of the next Fed rate increase.
The benchmark index on Thursday briefly fell to 2,157.09, near the lower bound where it’s found support in the past month, as crude oil sold off and data showed an unexpected contraction in manufacturing activity. The gauge rebounded in afternoon trading to all but erase losses, as gains in technology and consumer-discretionary shares offset declines in banks and energy producers. The Dow Jones Industrial Average rose 18.42 points to 18,419.30, after falling more than 100.
“A ‘headline miss’ would come as little surprise this time around, although nothing can really be said to be expected with this erratic data-set,” Michael Shaoul, chief executive officer of Marketfield Asset Management in New York, wrote in a note this week. “With the FOMC increasingly split between those who wish to raise the policy rate and those that wish to wait a while longer, the quality of U.S. labor market metrics is likely to be a key determinant as to what actually transpires in the coming weeks.”
To Leo Grohowski, who helps manage more than $197 billion in client assets as chief investment officer of BNY Mellon Wealth Management in New York, a stronger jobs report could spark a selloff as the prospect of higher borrowing costs is seen as outweighing the benefit from economic strength. Prices for Fed funds futures imply a 34 percent chance of a rate hike in September.
“You’re seeing the nervousness around the employment number and the Fed creep back into the market,” said Grohowski. “It’s frustrating when there’s so much riding on a number.”
A recent surge in the CBOE Volatility Index reflects some of that anxiety. After reaching a two-year low on Aug. 19, the measure of market turbulence known as the VIX has climbed in eight of nine sessions while capping its biggest monthly gain in a year. The gauge rose 0.5 percent Thursday. About 6.4 billion shares traded hands on U.S. exchanges, 6 percent below the three-month average.
Investors have ample reason to be apprehensive. The weakest economic recovery since World War II, along with lower oil prices and a stronger dollar, has taken its toll on corporate profits. S&P 500 earnings dropped for a fifth straight quarter during the April-June period, the longest decline since the global financial crisis. As the index hovers near record highs and analysts’ profit forecasts keep falling, stocks are trading at the highest multiple in more than a decade.
Among shares moving today, Wal-Mart Stores Inc. advanced 2 percent as the retailer plans plans to move about 7,000 back-office workers in its supercenters to other parts of the store in a push to streamline operations. Campbell Soup Co. sank to an almost seven-month low after a disappointing forecast, hurt by a product recall and a poor carrot harvest at its Bolthouse Foods unit.