Special Market Update

Jobs Data Roils Markets, But Not Us

Just yesterday we discussed how the jobs report was the hinge on which today’s market would swing. Today, that hinge looks like a yardarm.

As you may have seen, and no doubt by now have noticed, the unexpectedly bleak jobs report, the weakest in four years, coupled with downward revisions of the prior two months, sent shock waves through the futures markets before the open and set the stage for a fairly significant sell off at the open. That’s the first shoe to drop; the global markets, whose economies rely on the strength of the US consumer almost as much as our own, will be similarly stunned by the news when they re-open next Monday (or as early as 6PM EST on Sunday). Their reaction is one the Fed knows about and may in fact have something to say about in order to modify the potential for a widening fall out. Then again, the Fed may simply let the markets run their free (fall) course.

Today, I wouldn’t be surprised to find the market fight the “recession” tape and at least bat above its intra-day lows for a time period (only to likely yield to significant selling pressures which tend to characterize not only days when negative surprises startle, but Friday’s when levels of uncertainty are heightened). Naturally, we can look to gold and recession-proof stocks (consumer staples, pharmaceuticals) to behave fairly and/or relatively well. But we can also count on our well diversified portfolios and manager know how to help buffer some of the blows.

The fact that the negative jobs number surprised everyone, including me, as did the lower revisions of previous reports increased an unspoken concern that the Fed may actually be behind the curve of safeguarding the economy from recession, when just yesterday the market was trading on the assumption that the economic data was painting a picture that could rule out a rate cut any time soon. Silver lining: Today’s jobs report basically seals the deal for a rate cut of at least 25 basis points when the Fed convenes on September 18th. And, don’t forget that just as these numbers were subject to downward revisions, so they can be subject to upward ones.

Will cutting rates be the panacea that everyone seems to be thinking it will be? I think it’s doubtful; for one thing, a cut of 25 basis points isn’t likely to shore up the crashing housing market by suddenly setting dramatically better borrowing rates and stimulating dramatically greater numbers of borrowers – anymore than such a rate cut could be viewed as stimulative for the now moribund M&A business (both of which, the business of housing and the M&A business have been stimulative for the markets over the past several years).

If the Fed takes the unusual step of either intervening ahead of their scheduled meeting, or breaking a multi-year and multi-Fed trend line of moderate (i.e., 25 basis point moves) rate step policy, that could signal and/or be read as signaling that the Fed is extraordinarily concerned about the threat of recession – which would not only be a complete reversal of their prior position expressed just a few weeks ago, but would, I think, more easily upend the market rather than propel it.

Of course, jobs aren’t just a Wall Street issue, they’re a Main Street issue, and as such are key to our economy’s financial engine. The fact that jobs have weakened dramatically and suddenly needs to be viewed in the light of longer-lived trends. One vote for a trend (negative) is the past few months since the numbers over that time period were weakening (as indicated by the lower revisions). If that trend continues for three or more months, recession is a clear possibility and we’re always already monitoring our holdings and overall allocations with current risks and possible forecasted outcomes in mind. While I’ve been saying nearly year-long that I think the threat of recession is around 35%, today’s numbers make me revise risk of recession to 45% – not quite 50/50 but heading in the wrong direction.

What we know: the housing market is in a recession. The M& A (mergers and acquisitions) market is in a recession. The credit market is in a recession. The jobs market could be heading toward a recession. So, what gives?

Likely, the markets will give – in the form of giving back gains to the tune of 10% or more over some near-term time period from current price levels if the above trend lines (housing, credit, jobs) continue to weaken. This is within our call for a correction between 10% and 20% this year; and if the market was to give back 10%, it would be down about 5% – after a string of multi-year gains that would make any fund company or hedge fund company envious.

But, if the markets take their current read of the jobs data as a sell signal, should we? Well, for one thing, the Fed has to be puzzled about why all the anecdotal evidence (such as the data complied in the Beige Book) reiterated just this week that our economy isn’t in recession. What gives?

The trouble with recessions is that you never know you’re in one until you’re most likely nearly out of the one you finally determined was one. If anyone could predict a recession (from the Fed on down to investment advisers like ourselves) we’d never have a recession or always be in cash before day one of any recession occurred. True, some perennial bears and lucky guessers suddenly seem to be clairvoyant; but even that clairvoyance is determined through any prior recession’s rear view mirror, not in advance of it. Moreover, since it’s too early to say that the economic data says that we’re in or even heading into a recession, it’s too early to say that today’s herd is heading toward an OK corral.

I continue to think that uncertainty is likely to increase and set the near-term tone and direction for the domestic and global markets; on days when the level of uncertainty dissipates, look for gains. On days when the level of uncertainty increases (such as days when unexpected data, news, or any other factor on our well known list of possible impingements), sell offs will likely be the rule.

Will there be more of the latter versus the former days? If I knew that answer I’d be the only one who could say they did; but that fact underscores the benefits of our proven, risk adjusted investment discipline and diversification as well as our considered long-term view. So far, despite the sudden blows the market has delivered this year, we’ve managed to rise above the fray. I don’t intend to let my guard down anytime soon or do any less than that . . . ever!

Have a great weekend – and, Go Pats!