The monthly employment reports have been providing surprises all year. For the first seven months of 2014, the employer payroll reports came in strong. They averaged 226,000 new hires each month and consistently surprised analysts who held the belief the economy was improving but at a pace much slower than the reports suggested.
However, seven consecutive months of data points inconsistent with their personal view can make even the most stubborn economist change their mind. In preparation for the August reports, economists were on a mission to not get fooled again, and they put forth an aggressive consensus estimate that employers created 225,000 new jobs for the month.
Just like the market often seems to go the opposite direction of the consensus, the economy can also make the majority look foolish. That’s exactly what the August report did with employers claiming they added only 142,000 jobs. Economists’ estimates were off by “only” 58%, yet we haven’t heard of any of them becoming an unemployment statistic in September. Maybe the inevitable revisions will make the forecasters appear less wrong, but then again, maybe they won’t.
Despite the shortfall in job creation, the “official” unemployment rate dropped again, falling to 6.1%. The reason, as we have highlighted many times throughout the past few years, is the participation rate dropped again and now stands at just 62.8%. The household survey, which supplies the raw data for the unemployment rate calculation, indicated that just 16,000 more civilians became employed in August while the quantity considered to be “not part of the labor force” jumped by an astounding 268,000. The debate of whether the ongoing decline in the participation rate is structural or cyclical continues. However, there does not appear to be any debate the decline is harmful.
Fed Chair Janet Yellen is on record with her skepticism about the ability of the unemployment rate to tell the whole story. She believes a large amount of slack is still in the labor market and therefore intends to be cautious about tightening monetary policy too soon. The August report seems to bolster her position.
Health Care sits at the top again this week as some market segments begin to pick up volatility. Its defensive reputation served it well. Consumer Staples and Utilities, the other defensive sectors, are also holding their own in recent market action, although they are much further down the rankings at this time. Technology, which was pushed down a spot to second place last week, continues in that position today. Real Estate climbed two notches to land in third, while Financials held steady in fourth. Consumer Discretionary slipped two spots to fifth, essentially trading places with Real Estate. Also swapping places were Utilities and Materials, with the previously mentioned defensive characteristics of Utilities allowing it to gain an edge. Consumer Staples and Industrials held their ground but continue to lag the market. Telecom’s three weeks at the bottom have come to an end. Not because Telecom did anything great this week, but because Energy fell relatively hard, flipped over to a negative trend, and took over last place.
All eleven style-box categories are in the same ranking order as last week and all lost momentum. Mid Cap Growth is on top again with Large Cap Growth in second. This duo at the top signifies the market’s preference for Growth over Value at this time. Mid Cap Blend, Mega Cap, and Large Cap Blend round out the top five, which is notably devoid of any Value categories. Mid Cap Value and Large Cap Value are next in line before momentum scores begin to deteriorate into the lower portion of the rankings. The bottom belongs to the three Small Cap categories plus Micro Cap, the smallest of the small, sitting in the basement again.
The ping-pong game between China and Latin America for first place honors goes to China this week. Chinese equities were among the top performing categories since our last update, resulting in a 16-point increase in momentum and a recapture of the top spot. Latin America took the opposite path. Equity prices there took a tumble, with Brazil giving back about half of its August gains and the Latin America category shedding 19 momentum points in its drop to second place. If the region stabilizes quickly, it may be able to hang on to its superior ranking a little while longer. Emerging Markets and the U.S. both moved up one notch to grab third and fourth respectively. Their climb was made possible by weakness in the Energy sector, which resulted in energy-rich Canada falling two spots to fifth. Pacific ex-Japan, World Equity, and Japan held their positions, although Japan flipped over to negative momentum. EAFE and Europe both improved while remaining in negative territory. Europe’s 10-week stint on the bottom has concluded with the U.K. now holding down that spot. The U.K.’s weak performance so far in September is almost entirely attributable to a fall in the British Pound against the dollar and even the euro. Its currency woes stem from the growing desire of Scotland to break away and be independent.
“Today’s disappointment is a reminder to every once in a while check your enthusiasm.”
Michael Feroli, chief economist at JPMorgan Chase in response to the August employment report
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