FYI | Jul 06 2016
By Peter Switzer, Switzer Super Report
This week could prove to be the most important week of the year for anyone who wants to believe that stocks can go higher this year. However, even more crucially we might see something that leads to a sustainable rise in share markets.
The US stock market had its best weekly rise for 2016 with the Dow and S&P 500 indexes up over 3% but a lot of this rise was based on central bank promises worldwide to keep money easy because of the surprise Brexit vote.
If you like, a UK recession fear and even an EU break up threat were trumped by the threat of collective central bank action. On one level, that’s great but one day that trick might not work, especially if negative interest rates prevail for too much longer.
The best way to rid the world of negative interest rates will be economic growth and jobs, which was the PM’s election war cry. It was a pity he could not sell them as well as he needed to!
But back to the bigger picture — the global economy and the associated stock markets — and we all know the USA holds all the aces.
We know (under most circumstances) that if Wall Street slumps we all slump and vice versa.
So, what big revelation this week could be crucial to the New York Stock Exchange and the Nasdaq? It’s simple — the jobs report, which is out on Friday night our time.
In fact, the entire economic snapshot out of the US will be closely watched with factory orders, durable goods, the latest reading on the growth of the services sector and the latest Fed minutes all being important to market watchers.
But the jobs report is the biggie. This was the Bloomberg headline after the May numbers were reported on June 3: “Weak US Jobs Report Kills Hopes for June Fed Rate Hike.”
And note the word “hope”, which is a clue to what market experts really want — it’s a stronger than expected economy that justifies an interest rate rise this year.
The last jobs story was 38,000 jobs, when the expert forecasters were expecting 164,000! That was a big miss not helped by a substantial strike at Verizon but economists were not using that as an excuse to remain hopeful.
Michael Feroli, chief US economist at JPMorgan Chase & Co. in New York, said the report “raises some questions about the momentum of growth and about the outlook.”
“This takes June off the table,” he said. “To get to July, we’re going to need a pretty nice rebound in the data.” (Bloomberg)
On the plus side, this week we saw the first quarter growth for the US pumped up from a tepid 0.8% to a still weak 1.1% but second quarter growth forecasts were pushed up to around 2.4% last week, which is a nice sign but is not necessarily a reliable one.
That’s why the pressure is on for this June Jobs Report out this week.
The jobs market does look strong so I’m hoping the June number makes the May one look like a rogue figure. Claims for unemployment relief have now been below 300,000, a threshold associated with a strong jobs market, for 69 consecutive weeks, the longest streak since 1973, Reuters reported last week.
The number to keep in your head is 180,000 jobs, which a Reuters’ survey of the top economists came up with. If the number is way below this level the market could sell-off on fears of a real US slowdown or there could be buying on the belief that there will be no rate rises in the US in 2016.
This optimism could be short-lived when the recession rumour mongers get going and it was this kind of economic trash talk that pushed our S&P/ASX 200 index down to 4700 or so earlier this year. We closed Friday at 5246.6.
On May 27, not that long ago, we were at 5427.70, and I reckon news that the US economy is doing miles better than expected will be the kind of fillip our stock market needs, especially with election uncertainty not likely to be a help to share prices this week.
The Brexit and the UK recession fears made the push into bonds more aggressive but this could be reversed if the Yanks pull off a better than expected job creation number.
Interestingly, when bond yields fall below dividend yields for stocks it has been good for stock prices but that’s more a short-term response. A stronger for longer US economic story could be the basis of a sustained rise in stocks, especially after the US presidential election, which remains a bogeyman for equities of even bigger Brexit proportions.
That said, a strong US economic outlook might even trump the negativity of a possible Trump victory.
In a world where democracy is allowing crazy voting outcomes from Austria to Spain to the UK to here and possibly the US, a faster growing US economy could be a great boon to stock players.
Don’t even think about the reverse of this — a weaker than expected US economy and a President Donald Trump!
All this explains why I think this could be the most important week for stocks.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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