The markets have a lot to process in a holiday shorted week. In a normal year, many market participants take vacations during four-day weeks. That can lead to relatively light volume and volatility. But this is hardly a normal year. Many of us are staying closer to home than usual, more retail investors are engaged in the market, and business conditions are anything but normal.
This is also not a normal week. There are two events that would mark a significant week, even if it were of normal length. The second quarter ends on Tuesday, and the June payrolls numbers are released on Thursday. Each of these has the power to move the entire market in significant ways. However, the more important one is the monthly employment report, which is to be announced immediately prior to a three-day weekend in the USA.
Quarters end routinely – four times a year to be exact. But this has not been an ordinary quarter. Both the S&P 500 Index (SPX) and NASDAQ 100 Index (NDX) are approaching their best quarterly gains in about two decades. Institutional investors are often incentivized to “window dress” their portfolios – to make them appear to be properly invested when quarterly reports are compiled. That means there are all sorts of cross currents going into tomorrow that hard to predict. It is difficult to get clarity as to whether pension funds will need to sell outperforming equities to maintain their desired weightings across a range of asset classes, or whether underperforming hedge funds will crowd into the best performing names to make them look as good as possible. Of course those two factors and others could neutralize themselves, leading to muted moves. Without much clarity, it is more prudent to remain vigilant rather than try to anticipate something specific.
The more pressing concern surrounds the employment numbers to be released on Thursday. Weekly employment statistics are typically released on Thursdays, while the more detailed monthly numbers usually arrive on the first Friday of the month. Except, the first Friday this month is a public holiday in the US, so the results will be pushed ahead to Thursday. The May report revealed a huge positive surprise, though the Bureau of Labor Statistics (BLS) acknowledged that about 5 million people may have been classified as employed when in fact they were not. It will be fascinating to see how the BLS deals with those people in the upcoming release.
Investors need to have more than a passing interest in this release. Fiscal stimulus has been one of the catalysts for the markets’ recent bounce, and the potential for future fiscal stimulus may hinge on the results. The Democrat controlled House of Representatives passed another stimulus measure, but it has not cleared the Republican controlled Senate. Various Republicans said that the May employment numbers reduced the need for further stimulus, and published reports assert that the desire for and the size of another stimulus package hinge somewhat on the jobs numbers this week. More than anything, markets view monetary and fiscal stimuli as the most important positive factors. With the Fed stimulus largely on hold over the past weeks, the prospect of additional fiscal stimulus looms large.
Remember of course that this is an election year, so political considerations are paramount. Congress is scheduled to discuss fiscal stimulus when it returns from its customary July 4th break. Some politicians love to be able to deliver tangible results to their constituents, while others prefer to demonstrate fiscal restraint. Delivering the goods to voters is likely to take precedence over principles, however, so much will depend on whether politicians see the current situation as improving, declining or stable. Too good of a number, and the stimulus may be small or further delayed. Too bad of a number and markets may fear that any stimulus will be too late or have a muted effect. Good or bad depends on whether the non-farm payroll number comes in far above or below the consensus of a 3 million increase.
The employment numbers need to be Goldilocks – not too hot, not too cold – just right.
Disclosure: Interactive Brokers
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