Editor’s note: JJ Kinahan, Chief Market Strategist at TD Ameritrade, is out of the office this week.
(Thursday Market Open) Call it a move in the right direction.
After two weeks creeping higher, new unemployment claims fell substantially last week and might help the market rebound from early softness Thursday. Initial claims of 1.186 million were well below analysts’ expectations of around 1.4 million and the prior week’s 1.435 million. Continuing claims, which had been a major concern in last week’s report, also fell.
This positive news could make tomorrow’s July employment report more interesting. If claims had kept rising, then no matter what headline number came out tomorrow the talk would likely have been about how the report didn’t pick up the most recent weekly data. Instead of that, these lower numbers today could allow investors to get more insight into the actual jobs situation tomorrow instead of stirring a debate.
Aside from the early claims news, it’s kind of a waiting game today. We’re waiting for Friday’s payrolls data and for Congress (more on both below). Major indices overseas mostly fell Thursday, and a cautionary, risk-off tone seemed to take hold. That was most evident in gold’s rise to new record highs well above $2,000 an ounce.
Crude stepped back slightly after making five-month highs yesterday, and the dollar gained. All of these metrics arguably point to investors taking a little risk off the table ahead of both the jobs report tomorrow and uncertainty over the stimulus.
In news from the mother country, the Bank of England kept rates at a record low of 0.1% and left the central bank’s bond-buying program unchanged. Back home on the monetary front, Dallas Fed President Robert Kaplan is scheduled to speak this morning soon after the open.
Payrolls Straight Ahead
With payrolls data looming first thing tomorrow, we could see some back-and-forth trading today.
One thing to keep in mind is that the July payrolls data were mostly collected relatively early in the month, so they aren’t likely to reflect the late-July uptick we saw in weekly initial jobless claims. So in essence, whatever kind of jobs headline you see tomorrow morning, the next sentence in the article is probably going to refer to the bearish initial and continued claims numbers that won’t be in the payrolls report. That’s the caveat.
Another thing about payrolls to remember is that there have been some hiccups in collecting the data since the start of the crisis. A portion of the data comes from a household survey conducted by the government, and some household reporting has been incorrect. That means revisions from the prior report could be in store.
Speaking of approaching data, we’re far from finished with earnings season. Uber Technologies, Inc. (NYSE:UBER) is sharing its results today after the close and could provide a good look at how the company is navigating this strange environment. As we noted earlier this week, the question is whether anticipated delivery strength was able to outpace expected weakness in passenger revenue.
UBER was one of many consumer-oriented stocks that had a nice day yesterday as reopening optimism kept growing. All the vaccine developments so far this week have sounded good, and we basically have four companies competing to get a vaccine on the market in roughly the same time frame. There could be a gap in news, however, as larger trials are now getting underway and initial results might be a while off.
Few stocks arguably represent reopening hopes better than The Walt Disney Co. (NYSE:DIS), because it competes in so many different aspects of the economy that could benefit from normalcy. Shares rose nearly 9% Wednesday and were up double-digits at times as the stock hit a new post-pandemic high.
DIS might have rallied in part because revenue declines for its parks and media networks weren’t as bad as some analysts had thought they’d be. The company’s move to streaming also appears to be getting widespread investor buy-in.
The Great Outdoors is Calling
On the theme park and movie side, what appears to be helping DIS and markets in general is that data for the U.S. at large have gotten much more positive lately. We’re at least getting some initial indications that we could be sort of over the hump. If that’s actually true, traditional entertainment and consumer venues could see more business.
This hope for progress on the pandemic remains a theory, of course, and it’s always possible things could get worse. The virus is incredibly unpredictable, and no vaccine is proven yet in a large trial.
Still, the S&P 500 Index (SPX) finished Wednesday just 2% away from its all-time high of 3393 posted in mid-February, and the Treasury yield curve widened slightly after the 10-year yield hit a nearly five-month low just below 0.51% the previous day. A widening curve (when longer-term yields widen the gap vs. shorter-term yields) is sometimes seen as a positive sign for the economy.
Travel stocks were some of the biggest market victors Wednesday, with airlines apparently getting a lift from news out of Washington, D.C., that Congress is considering new financial aid to the industry. American Airlines Group, Inc. (NASDAQ:AAL) had a particularly strong Wednesday, rising nearly 10%.
Keep in mind before jumping on that particular flight that airlines continue to be very volatile and headline-sensitive, maybe even more than most other consumer stocks in this unprecedented year. Also, many analysts believe of all the airlines, AAL faces the highest hurdle due to perceived balance sheet woes.
Washington Wait is On
While we’re on the topic of Washington, many analysts credited hopes of a possible stimulus agreement for the slight pressure on bonds Wednesday. There’s growing belief that a deal between the parties could be reached today or tomorrow, though that’s subject to the usual cautionary warnings that accompany any political battle.
If a new stimulus does get struck, it doesn’t necessarily mean more room to rally. Instead, some of the strength early in the week might have reflected hopes for a deal, meaning the actual news might bring some selling. We’ll have to wait and see, but that’s how the market often responds to much-anticipated news.
From a technical perspective, an SPX move above 3259 could have been a first step toward launching a retest of the 3393 all-time high, according to a report from research firm CFRA. The index probably needs to stay above 3124 to retain its near-term bullish bias, CFRA said. There’s initial support at 3212.
Meanwhile, volatility seems to be on the run, instead of on “a run,” the way it was earlier this year. The Cboe Volatility Index (VIX) edged down to just below 23 on Wednesday as it slowly gave back more of its huge early-2020 rally and tested the recovery lows. Remember it was above 80 at one point in a historic surge to levels last seen at the peak of the 2008 financial crisis.
VIX can be kind of like the market’s third-base coach, signaling to a runner—or in this case an investor—whether they can run to the next base or if the stop sign is up. Back in June, a sharp and sudden rise in the VIX preceded a big sell-off in stocks, so don’t forget to keep an eye on this indicator.
Handicapping the Jobs Report. It wouldn’t be a shock if trading is a bit quiet today ahead of tomorrow’s July payrolls report. The data could be the most anticipated of the entire month. July jobs growth is projected at 2 million, according to the consensus on Wall Street tracked by research firm Briefing.com. That would be off quite a bit from 4.8 million in June, a number that was boosted mainly by businesses rehiring as the economy reopened. July unemployment is seen coming in at 10.5%, down from 11.1% in June, so some possible progress could be there.
If the numbers meet expectations, it might suggest the economy continues to recover from the first shock of COVID-19, but at a slower rate than in May and June. A slow grind toward better times isn’t necessarily a bad thing, but for the more than 17 million unemployed Americans, improvement can’t come quickly enough.
Jobs Report Part 2: Half-Empty or Half-Full? Two schools of thought are circling around as the numbers prepare to land. One—call it the “glass half-full argument—emphasizes that analysts expect the headline number to be another bell ringer following spectacular jobs growth in May and June (spectacular may sound like an exaggeration, but the country had never seen millions of jobs per month added until those two months).
The glass-half-empty argument is that stubborn growth recently in weekly initial unemployment claims could mean analysts are too optimistic. Some actually are far less positive in their job growth forecasts, pegging it at well under one million in July.
If the number comes in that low, it could signal that the slowing pace of reopening by mid-July might have had an impact. That said, the report’s survey week is generally just before the middle of the month, so any slowdown in late July won’t likely be captured by the data. Though it may seem hard to believe, job growth of one million might not feel like a million dollars to Wall Street, so to speak.
Where’s the Growth? Maybe that made you think of a famous 1980s fast-food hamburger commercial, if you’re old enough to remember. Even if you aren’t, it’s a question many investors should contemplate as they examine tomorrow’s payrolls data. It’s not enough to just look at the headline number if you really want a sense of where growth is happening and which sectors might be suffering or doing better than expected. The small print is where you can often find answers.
For instance, in June, jobs growth was dominated by leisure and hospitality. That sector added more than 2 million jobs as workers got brought back to restaurants, hotels, and other establishments that were reopening after the pandemic shut them down. The July report could show that tailing off a bit, assuming all the places that were planning to reopen had already done that by the time the July survey took place.
Manufacturing and construction employment—where a lot of steadier, high-paying jobs can be found—put on decent gains of 356,000 and 158,000, respectively, which is nothing to sneeze at. Consider keeping a close eye on those two in Friday’s report to see if that growth got sustained into July. If it did, that could be a positive sign that consumer demand for housing and big-ticket items like household appliances grew more solid.
TD Ameritrade® commentary for educational purposes only. Member SIPC.