It’s not always reality that accounts for moves in the stock market, but rather perception. And when it comes to Friday’s June unemployment report, perception is everything.
Friday’s report – to be released at 8:30 a.m. EDT – is being viewed as pivotal. Economists are calling for an addition of 110,000 jobs and an unemployment rate that holds steady from last month’s 9.1%. The report comes in the wake of a string of less-than-impressive data that weighed heavily on earlier hopes for a sustainable economic recovery.
The jobs market, in particular, was a source of disappointment following the May report (released June 1) that showed only 54,000 jobs being added to the economy – well short of the estimated addition of 169,000. One reason for this soft number may have been the Japan earthquake, which led to supply-chain disruptions that have affected the global auto and technology industries. With this as the background, a Friday number above 110,000 could be viewed as an indication that the recent slowdown was a blip that will rectify itself as Japan’s production gradually comes back on line.
On the flip side, another bad number may be seen as evidence that the recent downturn is in fact signaling the onset of the feared “double-dip” recession.
The reality, of course, is that monthly jobs data is notoriously volatile and subject to revision, and any single report on its own can be deceiving. Still, the low-volume environment of a summer Friday means that this number should be a short-term market mover – particularly in light of the market’s hunger for fresh data points on the economy.
In the wake of last month’s disappointment, expectations were extremely muted coming into Thursday’s initial jobless claims and ADP data. This was creating room for a positive surprise on Friday to provide an additional boost to already-improving market sentiment. However, the potential for such upside may have waned somewhat after the ADP number came in well above expectations (+157,000 jobs vs. estimates for +60,000) and jobless claims, while still high, were slightly less than expected (418,000 vs. 425,000). These reports, together with positive same-store sales numbers from retailers, led to another strong gain for stocks, as of midday Thursday.
With this rally, stocks have now delivered a robust gain of about 7% in the last 14 sessions. With the VIX already in the low 16s — the extreme bottom end of its recent range — Friday’s jobs data probably has less potential to move the markets significantly higher than would appear to be the case. Investors may therefore want to approach this report with an element of caution, since a positive number now may have less room to fuel a rally than the extent to which a negative number could spark a move lower in equities.
More important, it is always wise to avoid making any moves based on the knee-jerk reaction that follows the number. This is especially true on the Friday of a holiday-shortened week, when many of the varsity traders are still catching rays in the Hamptons.
While the employment report is the focus right now, next week brings the unofficial kickoff to second-quarter earnings season when Alcoa (NYSE:AA) releases its report after the bell on Monday. More so than the jobs report, this earnings season will provide an important signal regarding the sustainability of the market’s strong recent performance, and will probably set the tone for the remainder of the summer.
