Earlier this morning, traders anxiously awaited the monthly employment report from the Bureau of Labor Statistics. This has become the most anticipated economic release each month (referred to be financial media as the “key employment numbers”). If the Fed is watching these numbers carefully, so must investors.
The Federal Reserve historically had a dual mandate to “foster economic conditions that achieve both stable prices and maximum sustainable employment”. While they somewhat modified that statement in August, Chairman Powell has continually reaffirmed — as recently as yesterday – that the Fed is unlikely to tighten monetary policy until the labor market attains full employment. Today’s release showed unexpected improvement in the labor economy, but we remain a long way from full employment. Economists expected an increase of 200,000 nonfarm payrolls but saw a gain of 379,000 instead. Combined with an upward revision to last month’s numbers, that meant that nearly 300,000 extra jobs were created. However, the unemployment rate beat estimates only slightly, coming in at 6.2% vs. an expected 6.3%, monthly hourly earnings rose an expected 0.2%, and the labor force participation rate met expectations at a relatively weak 61.4%.
If the market were in a better psychological state, this would be considered a “Goldilocks” result – not too hot and not too cold. It’s a labor market that is improving, but not far and fast enough to cause the Fed to veer away from an accommodative stance. Shortly after the numbers were released, that appeared to be the market’s interpretation. S&P 500 Index Mini Futures (ES) rallied sharply after some brief indecision and were up over 1% when the equity markets opened. They were even able to shrug off a rise in 10-year Treasury note yields. They yielded over 1.6% in the immediate aftermath of the number and as the equity indices opened at their highs.
Then a strange thing happened. Well, maybe not so strange in light of the recent performance of stocks during recent sessions. Major indices sank after registering their highs of the day (as of now). As I write this, the S&P 500 (SPX) is down about 0.75% and the NASDAQ 100 (NDX) is down over 1.5%. The VIX index is resuming its flirtation with 30, indicating investors’ increasing desire for protection. We now have to ask ourselves what has equity investors so spooked – especially when they can’t blame an unchanged bond market.
I believe that we are seeing the continuation of two trends that have the potential to cause a fair bit of short-term pain. One is the continuing pressure on high momentum stocks, particularly those that are widely held by the Ark Investments funds. I wrote about this a week ago, and urged caution because I saw traders actively targeting these holdings. I worry that this is growing into a larger negative feedback loop, with holders trying to lock in profits (or minimize losses, if they are newer entrants) as the funds drop. Many of the stocks in question have high weights in SPX, and even higher weights in NDX, and those indices will be under pressure if this feedback loop grows.
Also, I remain concerned that the need to raise money to pay taxes on April 15th may be weighing upon investors as well. It should certainly be considered carefully by investors who invested many of the trading profits that they earned in 2020 into investments that are performing poorly in 2021. Early last week, I wrote that VIX futures appeared to be pricing in worries about either tax payments and/or a “buy the rumor, sell the news” reaction to the fiscal stimulus package over the coming months. Liquidity needs ahead of tax day could reverse the inflows to which the equity markets have become accustomed.
That said, various technical indicators are pointing to major US indices as heavily oversold. That could result in a sharp snapback rally – much like we saw on Monday this week (doesn’t that rally seem far away right now?). Unfortunately, oversold indicators are not great at timing. Stocks and indices can remain oversold or overbought for extended periods of time. At present, I would take the message of the VIX index and remain poised for volatility over the short-term.
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