U.S. equities finished largely unchanged after large caps surged to new year-to-date highs, returning to levels not seen since early November.
There was no specific catalyst for the move amid relatively light trading, as attention remains on last Friday’s disappointing jobs report and the diminished odds of a Federal Reserve interest rate hike in June or July.
Now, the focus will turn to Wednesday’s Job Openings and Labor Turnover Survey for clarification on whether the labor market is, in fact, slowing despite evidence (including openings and wage inflation) to the contrary.
In the end, the Dow Jones Industrial Average gained 0.1%, the S&P 500 gained 0.1%, the Nasdaq Composite lost 0.1% and the Russell 2000 gained 0.3%. Treasury bonds were stronger, the dollar was mixed, gold closed little changed and oil gained 1.6% to close at a new year-to-date high.
Energy stocks led the way, adding 2.1% to bring its gain to 3.7% for the week so far, as crude oil remains strong. Traders continue to be preoccupied with supply disruptions in Libya and Nigeria. Health care stocks were the laggards, down 0.7%, as weakness in biotech weighed.
Valeant Pharmaceuticals Intl Inc (NYSE:VRX) lost 14.6% after reporting a first-quarter earnings miss and lowered forward guidance. Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) lost 10.9% on a failure of the Phase-3 study of a drug to treat a muscle-weakening illness. And LendingClub Corp (NYSE:LC) lost 7.4% after delaying its 2016 annual meeting, as developments (including a management shakeup) have left the company unable to report its current state.
Stocks looked nervous all day, despite the triumphant retaking (and subsequent loss) of Dow 18,000 for the first time since April, as the CBOE Volatility Index (INDEXCBOE:VIX) was well bid all day. Part of the problem is that Fed officials have entered their media blackout period ahead of their policy meeting later this month (and thus, no constant Fed-related headlines). And tomorrow’s job openings report is likely to confirm that May’s weak payroll report was a fluke.
Ed Yardeni at Yardeni Research notes that the disappointing payroll numbers didn’t jive with other data points including job openings (at a near record), private-sector payrolls, buoyant consumer confidence and measures of wage gains. One possible explanation: The labor market has tightened to the point that it isn’t about a lack of hiring, but a lack of qualified and willing workers, weighing on payroll gains.
If so, we should expect lower payroll reports, but accelerating wage inflation and thus, more impetus for the Fed to hike rates. Wednesday’s JOLTs report should confirm this.
With the specter of Federal Reserve interest rate hikes likely to rise again, as wage inflation is the main motivator of overall inflation, investors will only be left with fading fundamentals including uneven U.S. economic growth, an outright corporate earnings recession (four consecutive quarters of falling S&P 500 profitability), and the fact that the median stock has never been more overvalued based on price-to-sales and other metrics according to Goldman Sachs.
Thus, I expect the three-week melt up — capping a three-month oil-fueled rally — to reverse lower in the coming days.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
