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Why investor complacency could evaporate in an instant

Peter Kenny
Peter Kenny

By Peter Kenny, chief market strategist for Global Markets Advisory Group and owner of KennysCommentary.com

Without question, the most important and widely anticipated economic data release we received last week, as it relates to inflation and the Fed’s timeline on rates, was Friday’s release of the initial August Employment Report by the BLS. Frankly, it was a bit anticlimactic given the beat on the ADP Repor, which was released earlier in the week. The initial reading of the August Employment Report reflected a gain of 156k versus consensus that had been calling for 180k. Additionally, the unemployment rate ticked up to 4.4% from 4.3%. Perhaps most importantly, as it relates to inflation and the Fed, hourly earnings were a weaker-than-expected 0.1% versus July’s 0.3%. Even the average workweek slipped to 34.4 hours from the previous 34.5. That said, the disappointment that came as a result of a broadly weaker-than-expected employment report was largely offset by strength in the manufacturing sector. Not only did August see a gain of 36k jobs in manufacturing versus consensus of 9k, July’s manufacturing payrolls were also revised higher to 26k from the initial 16k.

The strength in manufacturing that was highlighted by the August Employment Report was not an outlier. As a matter of fact, manufacturing has been on a bit of a resurgence in recent months and quarters, as has been reflected in the data. According to the Institute for Supply Management (ISM) their Mfg Index released on Friday of last week for August came in at 58.8 versus consensus of 56.6 and July’s 56.6. ISM’s manufacturing composite reading was led by a surge in production which came in at 61. July’s production reading was the third consecutive month over 60. Strength in manufacturing and production have been present all of 2017 and appear to be picking up momentum. Consider that on November 1, 2016, the ISM Manufacturing Index stood at 51.9, up from September’s low of 49.4 and February’s 48.2. In other words, from February of 2016 to this August the ISM Manufacturing Index has risen 26.5%.

There were other indications of economic strength and acceleration in the readings we received last week. August’s reading of Consumer Confidence from the Conference Board was 122.9—the second-highest reading extending back to December of 2000. Corporate Profits remained healthy, posting an 8.1% expansion in Q2. Q2 GDP was revised up to 3.0% from the initial revision of 2.8%. Real Consumer Spending (Q/Q- SAAR) within the Q2 GDP report was a healthy 3.3%. The Challenger Job-Cut Report did reflect a rise to 33,825 in layoff announcements for the month of August—well above July’s 28,307.

Lots of Fed speak this week

This week’s abbreviated trading will be punctuated with eight Federal Reserve officials speaking. Today, Factory Orders came in at -3.3% versus expectations of -3.2%. Wednesday, the focus will be on the Beige Book, which is released at 2:00 p.m. Eastern. The calendar is weighted towards Thursday, when we get Weekly Jobless Claims, Productivity and Costs, the EIA Petroleum Status Report and the Quarterly Services Survey, which will garner the most attention. Wholesale Trade rounds out the week on Friday.

The Nasdaq (^IXIC, QQQ) posted its best week of the year last week, while the S&P 500 (^GSPC, SPY) posted its sixth-best week. Importantly, the small cap Russell 2000 (^RUT, IWM) finished the week outperforming the broader market by closing 0.6% higher on Friday. For the week, the S&P 500 gained 1.4%, the Dow Industrials (^DJI, DIA) gained 0.8% and the Nasdaq rose 2.6%.

Last week’s performance allowed for the market outlook to revert back to a “confirmed uptrend” from the previous week’s “uptrend under pressure.” Investors remain confident, economic data reflects a strengthening economic landscape, and many remain convinced that the Trump agenda will bare fruit in spite of little in the way of legislative accomplishments thus far in 2017 on the part of the 115th Congress. September will certainly be an incredibly important month for investors who expect any headway in Washington. At the top of investors’ wish lists is tax reform—or any movement in that direction.

Hanging above all of this constructive economic, corporate, and earnings landscape remains North Korea. North Korea is the variable that investors either cannot seem to adequately price into markets or don’t want to. The VIX (^VIX, VXX) remains stubbornly subdued. Gold (GC=F), historically a safe haven, has ticked only modestly higher in recent weeks, and US Treasurys (^TNX, TLT) have remained range-bound. That complacency could evaporate in an instant.