What is going on here is that after the S&P made a 5.8 percent downside correction off its all-time highs during last Monday’s sharp selloff, by the end of the week everything was coming up roses again as this index underwent its best two-day rally since October with a 2.6 percent advance! And for those market purists out there, this correction matched exactly the amount of the largest one of 2013, namely the 5.8 percent setback from late May that ended in late June after Fed Chairman Bernanke first threw out the trial balloon that some sort of tapering of the $85 billion a month in bond buying stimulus was on its way.
And what made this upside turnaround so dramatic was that in addition to the S&P getting clobbered, the Dow had done even worse with a 7.3 percent fall from its highs to a three-month low, the overall market put in its worst one-day performance last Monday since June, and the Nasdaq suffered its worst opening-day decline for February in history.
Equities had sort of stabilized last Tuesday and Wednesday before making a large upside gain on Thursday with a 188 point advance ahead of Friday’s always important monthly jobs report. What made it seem as if an upside performance of this sort could not be replicated the next day is the old theory that it is never good for the overall market to make a large upside move ahead of a major event, or for a stock to rally sharply into its earnings report because it creates a situation where the good news is already baked into prices, so to speak, and then the “buy the rumor, sell the news” dynamic comes into play.
For instance, how many times do we see a stock sell off after an upside move going into earnings that turn out to be good and then the stock declines during the next trading session? And the explanation is that the already strong move in the stock had already discounted the good news leaving no one else to buy, and lower prices result. We saw this recently with the shares of AAPL, BA and INTC, all of which beat their forecasts after having rallied into earnings and then proceeded to sell off during the next session.
The estimates for Friday’s report were for January job creation in the neighborhood of between 175,000 to 185,000 and the unemployment rate to fall from 6.7 percent to 6.6 percent, with perhaps a nice upward revision to the miserable 74,000 jobs that were created in December.
And sure enough, despite the estimates of the experts whose job it is to predict such things, the official number came in at only 113,000, which was below the lowest estimate out there. Naturally, the various stock index futures, which were trading higher before the release of this 8:30 a.m. report, did a complete about-face in a knee-jerk manner to trade immediately lower, indicating that equities would open down when trading began at 9:30 a.m. But then, to the consternation of the bearish contingent, these same stock index futures did an almost as-fast reversal to the upside, setting the tone for what turned out to be another very strong session as the Dow ended with a closing advance of 165 points.
The report itself had something for everyone in the sense that the headline number once again, for the second month in a row, showed a lower number of jobs than what the experts had predicted, and in fact this was the weakest jobs growth for two months in the last three years.
On the other hand, as previously mentioned, the jobless rate fell to a five-year low at 6.6 percent. The December number was revised upward by only 1,000 to 75,000, and November’s new total was now 274,000 from the prior estimate of 241,000, and this was the largest gain since last February. This meant that the two most recent months now showed an average 94,000 gain as opposed to the 204,000 for the first 11 months of 2013. This reduced the average job gain for the last 12 months to 187,000.
There was also endless debate about how the miserable weather in January affected the numbers, but construction jobs did improve by 48,000 while the two weakest sectors were government jobs and the retail sector, no surprise here because this is a seasonal pattern.
It is always fascinating to watch how market dynamics and explanations change as, for instance, when equities were tumbling during the second half of January and the early part of this month, observers were quick to point out the collapse of currencies in emerging market countries such as Turkey, South Africa, Russia and Argentina. And now, when stocks made that terrific late-in-the-week comeback and were a bit higher as well on Monday, not a word is spoken about the ostensible cause of the collapse in the first place, as if everything is all right with the world once again.
Now that the fourth-quarter earnings reporting season is coming to an end, with 345 of the 500 S&P companies publishing their results, it is now projected that profits advanced by 8.3 percent while revenues are expected to be ahead by 2.7 percent. The latest estimate for the first quarter of 2014 is for earnings to show an increase of 4 percent.
The next major event for the market to deal with is the Congressional testimony of new Fed Chairman Janet Yellen to the House Financial Services committee, which took place yesterday and which will be analyzed in next week’s column. This testimony will be repeated to the Senate Finance Committee tomorrow. What could make this exchange have additional spice to it is the fact that the former committee is controlled by Republicans, who have a majority in the House, while the latter committee is controlled by Democrats who prevail in the Senate.
With the Republicans anxious to take control of both chambers of Congress in this fall’s elections as a prelude to the 2016 presidential election, the questioning could get highly partisan, with various members putting on a show for their constituents in order to highlight some disagreement with the head of the central bank whose policies could go a long way in shaping how the economy will be doing ahead of both of these historic elections.
Donald Selkin is the Chief Market Strategist at National Securities in New York, a veteran in the securities industry for 36 years who is widely quoted in the financial media.
If you have any questions, contact email@example.com.