It never ceases to amaze me how easily distracted and entertained market participants can be over what are inconsequential events.
Last week was no different with the Russian v. Ukraine situation.
I follow a couple of mainstream websites and blogs just to keep a pulse on groupthink. There was one particular site that was posting updates every time they occurred with an updated chart of the S&P 500.
I’m not kidding at 1:52pm the headline was “Stock Rally Stalls as RUSSIA TEST FIRES INTERCONTINENTAL BALLISTIC MISSILE.”
At 4:06pm the headline was “Market Closes at Record Highs on Russian ICBM Launch.” The S&P 500 (SPY) had moved a total of 0.1% in those 2 hours and 14 minutes.
Last week was about 2 things:
The various jobs reports
The US Consumer
If you get nothing else from this report on a weekly basis I hope that I ingrain in you the importance of not accepting headline numbers and instead understand what’s happening AT THE MARGINS.
On Wednesday, the ADP private payroll numbers were reported showing an increase of 139K jobs added in February. But what got very little attention was that the year-over-year growth rate in jobs for February was 1.9%, which is at the very low end of the range from the last few years.
In addition, January’s jobs number of 175K was revised lower to just 127K jobs added. In past months, December's jobs number was revised from 227K down to 191K and November was also revised lower from 289K down to 245K.
Marginal News At The Margins
So, in the last four months revisions to the initial reported ADP payroll numbers has eliminated 128K jobs that were thought to have been created, that’s the margin.
Those are also the types of numbers that get very little, if any, media attention. The ADP report was followed on Thursday by the weekly unemployment claims which hit a 3-month low.
On the surface, that seems like a great sign. And as I’ve said before, the weekly unemployment claims are the best indicator of the labor market, above both the ADP report and the non-farm payroll number. But if we dig deeper and look at what’s happening at the margin of the weekly unemployment claims we see a different picture developing.
Here is the year-over-year change in weekly claims for the last 7 weeks, starting with last week and moving backwards in time: -3.5%, -4.4%, -5.6%, -5.1%, -5.7%, -7.3%, -7.9%, -8.5%.
At the margin, the year-over-year decline in unemployment claims has been decelerating for 7 consecutive weeks. That’s a trend worth noting.
Friday brought the final labor report of the week, the non-farm payrolls. This report showed that 175K jobs were created, beating expectations of 149K. However, the year-over-year growth rate was below 2% for the first time since last April. So, while headline numbers were positive and “beat expectations” there's a troubling trend occurring at the margin in the labor market.
Laboring Economy Continues
Couple this with a data point that got zero press and the picture becomes even more clear. The employment sub-index of the ISM Services Index, which accounts for 90% of the US economy, fell off a cliff in February.
The employment index went from the highest number since November 2010 in January to the lowest number since May 2010 in February. This is the largest month-over-month decline in this number since the Lehman Brothers Bankruptcy.
Keep this picture of the labor market in mind as we discuss the US consumer in a more detail.
We received the income and spending data for January last week. Income rose month-over-month but continues to decelerate on a 2-year basis for the second straight month.
Overall spending also increased month-over-month because as spending on services accelerated on a monthly, 1-year and 2-year basis. Savings were essentially unchanged and remain at 12-month lows.
Consumers Losing Against Inflation
How much more consumption can be fueled by US consumers dipping into savings? The Federal Reserve reported last week new highs in household wealth due to huge gains during 2013 in both equities and home values.
With home values continuing to decline and the S&P 500 up just 2% year-to-date, spending fueled by the “wealth effect” of increased home values and larger investment portfolios will surely slow down.
I heard very little about this connection last week. I also heard very little about the fact that inflation continues to accelerate. The last time I brought this up in detail was in the February 3 report.
Here's an update on the year-to-date performance of several commodities that people typically pay for and use every day:
· Milk – up 24%
· Coffee- up 79%
· Corn – up 12%
· Sugar – up 8%
· Lean Hogs – up 25%
· Live Cattle – up 10%
· Oats – up 30%
It’s amazing to me that there could be certain markets that are up anywhere between 12% and 80% in 10 weeks and no one seems to be discussing them.
By contrast, gold (+11%), silver (+7.5%), US Treasuries (+5.6%) and the S&P 500 (+1.9%), all of which are underperforming the aforementioned commodities get tons of air time.
Bottom Line: Ugly But Up
So, in summary, the US labor market is languishing, income is decelerating, savings rates are at 1-year lows, the “wealth effect” is topping and the costs of foodstuff is increasing literally with each passing week.
This is what the data and the price movement of markets told us last week.
Did you see this story anywhere? Did you see this particular link between data points and markets anywhere?
If you did, please drop me a line at TheWhaleyReport@whaleyglobalresearch.com, I would be very interested in learning about that source.
As an observer of markets and media, most weeks remind me of playing with a cat with a laser pointer. It's funny to watch him run around in a circle or try to climb a wall to get to that little red dot.
As it relates to markets, be the guy holding the laser pointer…don’t be the cat.