With the market closed on Good Friday we will do the weekly commentary a day earlier. But do not confuse this shortage of trading days with a shortage of important things to discuss.
That’s because there seems to be something interesting afoot which I first noted in my previous commentary, Recession Alert: Are We There Yet?
The increased concern is that this week started with shockingly bad results for ISM Manufacturing including very low reading for employment. From there the pain train kept rolling downhill. This clearly explains the Risk Off activity on the week.
Full details on that, along with our updated trading plan is what is on tap. Just keep reading on for more below...
Market Commentary
We have seen weak economic data on and off for over a year. Just remember that Q1 and Q2 of last year actually saw negative GDP results.
However, the reason it was not technically called a recession is because there was no job loss. That measure of pain, along with economic contraction, is what makes a recession.
These past events have made it easy for some investors to slough off weak economic readings while still buying up stocks. The key for the recession watch at this point is to finally see cracks in the employment picture. And those are starting to add up as I shared earlier this week. Here is the key section:
“Now let’s follow that interesting thread about the depressed reading for the ISM Manufacturing Employment component which is now at the lowest post Covid level, 46.9. Many of us have pondered, including the Fed, what it will take for employment to finally weaken because that is likely the key nail in the high inflation coffin.
So this weak reading is a curious start to wondering if employment is finally ready to rollover. And just the very next day we get another clue that this trend may finally be afoot. That being the precipitous 632,000 drop in job openings from the monthly JOLTs report that makes it the lowest level since May 2021.
Think about it this way..
Step 1 before laying people off is to stop hiring new employees. This lowering of job openings may be that lynchpin for Step 2 being much larger layoffs around the corner that would lead to a rise in unemployment.
Let’s remember the vicious cycle that takes place once job loss is in the economic mix:
Job Loss > Lower Income > Lower Spending > Lower Corporate Profits > Rinse & Repeat
The “Rinse & Repeat” aspect is an acknowledgement that most often the solution to lower corporate profits is to lay off more employees. And that is how a crack in the unemployment foundation can become a much wider chasm over time.”
Since then, there have been 3 more shots fired pointing to a weakening of the employment picture. That includes Wednesday’s ADP Employment Change coming in at only 145K job gains when 200K was expected and considerably lower than last month’s 261K reading.
Later in the same day the ISM Services report not only dropped from 55.1 all the way down to 51.2 echoing weakness found in the ISM Manufacturing report, but the Employment component also took it on the chin. The services sector was the strength of employment and that declined markedly.
Then on Thursday we found that “Layoffs Are Up Nearly Fivefold So Far This Year”. Those announcements are often like a snowball that rolls downhill getting larger and larger until an avalanche forms.
The sum total of this bad employment news has many investors lowering their expectations for Friday’s Government Employment Situation report. The current forecast of 250K jobs added seems far too steep given the evidence in hand.
Also, investors will be very mindful of the month over month wage increase reading. This has been the form of sticky inflation the Fed has been most concerned about.
The Risk Off nature of all this news is not so obvious from the modest decline for the S&P 500 (SPY) this week. Rather it shows up more clearly by looking at divergence between large and small stocks in this chart.
Now let’s pull back to the past month and see what it shows:
Amazingly the overall market is up in the past month if you are just looking at the S&P 500. Yet as you can see now that is ONLY happening in the largest stocks. So now let’s look at performance by sector the past month:
These Risk Off facts in price action are quite bearish as it shows concerted “Flight to Safety” in both larger stocks and the most conservative sectors.
Now combine that with warning signs from the economy, most notably what appears to be the first rumblings of problems in employment. When you add it all up it points to now being another time to strongly consider the virtues of being bearish in your portfolio.
What To Do Next?
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Wishing you a world of investment success!
Editor of Reitmeister Total Return & POWR Value
SPY shares fell $0.19 (-0.05%) in after-hours trading Thursday. Year-to-date, SPY has gained 7.41%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
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