Last Friday’s employment reports drew a lot of attention, and rightly so. The Labor Department said that 873,000 more people were employed in September versus August. This number is from the household survey used in the official unemployment rate calculation, resulting in the huge 8.1% to 7.8% drop in the headline number. If you were expecting an equal drop in the number of unemployed people, then think again. That number was reduced by only 456,000. Additionally, of those 873,000 new jobs a full 582,000 were part-time jobs. To top it off, the population grew by 206,000 last month, so we needed that many new jobs just to break even.
So yes, the unemployment report was confusing. However, that is only half the story. On the same day, the Labor Department issued a second report. This report, compiled from a survey of businesses and government agencies, claims only 114,000 new jobs were created in September. Not even enough to keep up with population growth. If this was the number used in the official unemployment rate calculation, there would have been an increase in the rate and not a decline of 0.3%. You gotta’ love government mathematics.
There have always been month-to-month discrepancies in these two numbers. Historically, the differences between these methodologies have been reconciled with time. However, when one number is 665% larger than the other, it can no longer be classified as something minor. These reports will likely face major revisions. The next reports come out four days before the election. Get ready for some fireworks.
Earnings season has officially gotten underway. Alcoa (AA) went first and beat expectations, but then it turned around and lowered guidance going forward. Yum Brands (YUM) surprised to the upside, and its stock price was rewarded today. The sentiment surrounding 3Q earnings is negative, to say the least. Earnings for the S&P 500 companies are actually expected to decline 1.4%, and the ratio of negative to positive warnings has been a staggering 4.33:1. The bulls are hoping all the negative news is already priced into stocks and the market is poised for an upside move on the slightest hint of good news.
Health Care takes over as the new top-ranked sector, although investors should not jump to the conclusion that the sector is completely healthy. Johnson & Johnson (JNJ) tumbled yesterday due to a downgrade by Goldman Sachs, and there is the potential for earnings misses as well as well as never-ending political risk. Telecommunications, which had been in the top spot for a few weeks, slid down to second place. Financials was a big winner this week, posting a gain and climbing three spots in the rankings to third. Consumer Discretionary held on to its fourth place position. Energy slipped two places to fifth. Volatility has again returned to the sector. Materials has been holding relatively steady in the middle of the pack. However, Alcoa (AA) is dragging the group lower today as earnings season gets underway. Consumer Staples improved its position slightly as the defensive sector has the potential to move higher with investors growing nervous about the market. Industrials gained a spot but remains under pressure and vulnerable to flipping over into a negative trend. Technology slipped again this week and now finds itself in a tie for last place with Utilities. After a couple months in the basement, Utilities is starting to attract some buyers and could easily give up the bottom slot to Technology by the next update.
The extremism displayed in last week’s rankings is no longer prevalent. As you may recall, Micro Cap and Mega Cap controlled the top of the rankings while the three Mid Caps shared the bottom. Large Cap Value moved up to the top spot, while Mega Cap stepped ahead of Micro Cap to hold on to second. Micro Cap, the former leader, now has to be content with a third place ranking. Additionally, the Mid Caps are no longer on the bottom. Instead, they are scattered throughout the rankings with Mid Cap Value in the #4 slot, Mid Cap Blend at #6, and Mid Cap Growth down at tenth. The strength of Value over Growth becomes more evident every week. Today, all three Growth categories are residing near the bottom with none ranked higher than eighth. Even with all this shifting around, every Style category remains in a positive trend.
Europe continued to defy the skeptics, a group that happens to include us, by hanging on to its top ranking. Despite weakness in the Energy and Materials sectors, resource-rich Canada held on to its second place position. However, there is significant compression forming in all but the bottom two spots of the Global rankings, so these top two could be replaced soon. If the market weakness of the past few days extends into weeks, the new winner is likely to be the region that manages to fall less than the others. Pacific ex-Japan and Emerging Markets continue to hold their third and fourth spots for now. The next five categories are comprised of the same names as last week, although there was some minor shifting. The US now heads that pack, followed by EAFE, World Equity, UK, and China. The bottom two categories remain the same and continue to be isolated from the others above them. Latin America finds itself back down at its short-term support level today, and if that fails to hold, it will flip into a negative trend. Japan is the only one of our 32 equity categories with a negative trend this week, and the downside magnitude has increased. Japan’s dispute with China over territorial rights to islands in the East China Sea is costing it dearly in terms of reduced auto sales due to Chinese boycotts.