October 4, 2019 – Stocks had a roller-coaster week this week as economic data pulled investors in different directions.
Well, to be fair, most of the data this week was worse than expected. Tuesday’s ISM Manufacturing index showed a contraction. Thursday’s ISM report on the non-manufacturing parts of the economy was below expectations. That data dovetailed with data from other parts of the world in pointing to a slowdown in the global economy.
For their part, stocks posted gains Monday and opened higher Tuesday, but that ISM report quickly sent things into the red and the selling continued through most of Wednesday.
Thursday’s weak non-manufacturing data sent things lower initially, but it seems like traders remembered that the Federal Reserve seems to be generally looking for a reason to cut interest rates at this point and decided that bad news is good news and things quickly recovered.
Friday’s employment report was a little bit of a head scratcher in the sense that hiring seems to be slowing, but the unemployment rate is staying steady. That suggests that the pace of new job creation is more likely to be the result of fewer available workers rather than fewer jobs being available. Where it gets confusing is that wages remained flat. Basic economics says that if the supply of labor is shrinking while demand for labor is growing, the price of labor (wages) should rise.
While a breakdown of basic economics where it applies to how much people get paid for their work points to some structural flaws in the economic system, it is the Goldilocks scenario for stock traders in 2019. Continued hiring shows the economy is strong, but little to no wage growth means there’s no inflation. This again points to more reasons for the Fed to cut, or at least, fewer arguments against a cut.
The bond market seemed to have the same take ways from this week’s data. Odds, as tracked by the CME’s Fed Watch, of a rate cut in October went from 49% at this time last week to 89% today. While the odds of 50 basis points of cuts (the Fed has been moving in 25 bps increments for several years) by December went from 20% last week to 52% now.
With earnings season right around the corner, it’s hard to know exactly how long the bad economic news is good news for stocks trend will last. Earnings is generally a time when correlations between stocks get lower as the differences between companies are highlighted by divergent results. It will be interesting to see both what management teams forecast for the future and how investors may react to that news.
On the week, the S&P 500 lost 0.33%, the NASDAQ gained 0.54%, and the Dow Jones Industrial Average lost 0.92%.
Major indices lost little considering how much movement there was in the markets this week. It was alarming to see the S&P fall so quickly Tuesday and Wednesday, crashing through numerous levels of technical support (dotted lines) and its 50- and 100-day moving averages (green and yellow lines). The S&P continued to decline Thursday morning but was able to recover from support around 2,860. It was encouraging for the S&P to rebound and close the week above its 50- and 100- day moving averages, while also closing the week above the 2,940 level that hindered the index during the entire month of August.