I was shocked this week when my wife told me we only had a few more days to order new school uniforms for our son, and between that and the start of pre-season football camps, there are signs everywhere that summer is ending and life is about to get a lot busier, not just personally, but also in the markets.
Unfortunately, while there are still a few weeks left, this summer hasn’t been as quiet as we had hoped, and we’re reminded of that again today as stocks are down 1%.
We’ve been much busier than normal this summer – as there has been a lot to monitor, analyze and explain. July was a very volatile month in the markets, commodities have crashed, and we are now getting very close to what likely will be the first rate hike in nearly 10 years.
It’s a reminder that the reality is today’s highly correlated, global markets never really close, and as a financial professional your clients expect you to be on top of the markets 24/7.
That is why we created The Sevens Report, so that advisors can make sure they have an independent analyst that communicates with them every day and quickly identifies for them the risks and opportunities for:
- Commodities, and
- Interprets what economic data means for the market.
All in under 7 minutes every morning, every trading day.
The Sevens Report is the daily market cheat sheet our paying subscribers use to keep up on markets, seize opportunities, avoid risks and get more assets. We firmly believe we offer the best value in the independent research space.
And, we’ve done it again for our paid subscribers this week (and all summer) by providing them the “need to know” analysis of the:
- Fed Meeting (it increased the chances of a Fed hike in September)
- Rally in the bond market (and why a flattening yield curve is a potential warning sign for stocks)
- Recent stock market volatility (we gave two leading indicator ETFs that will tell us when stocks have bottomed)
In today’s full Report, we made sure that our subscribers had the “Need to know” information for the remaining key events this week:
- Tomorrow’s Jobs Report and
- China’s Trade Balance (which will have a big impact on commodities)
Bottom line, since July the market has been volatile and we think that’s a trend that will continue for rest of 2015.
And, when stocks drop like they are today, clients call regardless of the season because they feel like they aren’t in control. And, the best way to retain those clients is to show them that you are in control.
The best way to do that is to know exactly what is moving the markets, and whether those factors are a bearish game changer, or just the market finding excuses for a normal correction.
That’s where The Sevens Report comes in.
Markets are going to get more volatile, period. Our job is to help our subscribers use that volatility to demonstrate they are on top of the markets, so they can 1) strengthen the client relationship (and get more referrals), 2) gather more assets, and ultimately 3) grow their businesses.
With a September rate hike a 50/50 proposition, every economic indicator is important, but obviously tomorrow’s jobs report is more important than most indicators. Last week, we were surprised by how “off” the financial media’s interpretation of the Fed was, as frankly the FOMC statement strongly implied a September rate hike is looming.
With that in mind, I wanted to provide our “Jobs Report Preview,” which was sent this morning to paid subscribers, so that you know quickly and directly what will make tomorrow’s report good or bad for the markets.
Jobs Report Preview (Sevens Report Excerpt)
The fact that the Fed in last week’s statement said that “some” additional improvement in the labor market was necessary for a rate hike in September means that unless this jobs report is “Too Cold,” the likelihood of a rate hike won’t decrease. Point being, the bar is pretty low for the number tomorrow to further confirm a September rate hike.
Really, the best-case scenario is that this jobs report generally meets expectations and confirms the “one and done” Fed policy outlook.
A “Too Hot” number will start a discussion of two hikes in 2015 (which would hit stocks) while a “Too Cold” number will cause concern about economic growth (which will hit stocks). A “Just Right” number will likely result in a continuation of the rally.
Finally, Friday’s soft ECI (Employment Cost Index) means the m/m wage increases now are almost as important as the headline jobs number. Expectations are for 0.2% m/m growth. Year over year, 2.2% remains the target for the Fed on wage gains.
The “Too Hot” Scenario (What it Takes to Materially Increase the Chances of Two Rate Hikes)
> 300k Job Adds. If we see a 300k or higher jobs report, the chances of two hikes go up materially and that will be a negative on stock prices.
< 5.2% Unemployment Rate, ≤ 10.5% U-6 Unemployment Rate. In the March statement the Fed lowered “NAIRU” to 5.0% and below, so it’s going to take a material drop in the unemployment rate (bringing it close to 5%) to increase the chances of two Fed rate hikes.
> 2.4% yoy wage increase. Data on wage gains has obviously wavered recently, so it’ll take an almost impossible jump in the yoy wage numbers to make the Fed consider two hikes.
The “Just Right” Scenario (September Rate Hike)
180k—280k Job Adds, 5.4%-5.6% Unemployment Rate, 2.1% – 2.3% YOY wage increase. The range for this number to be “just right” or “Goldilocks” is pretty wide, and this is by far the highest probability. If the number is at the higher end of the Goldilocks range then that will probably be a good tailwind on stocks, as it will cement the “one and done” expectation of the market—and stocks can rally in that situation.
The “Too Cold” Scenario (December or Early 2016)
< 150k Job Adds, ≤ 2.2% yoy wage increase. This number will be technically “dovish” but it’s not a positive for stocks or the economy, so fade any material rally on a number this week. The Fed wants to get at least one hike in, and if the job market starts to soften and the Fed feels the economy isn’t strong enough for one hike, that’s not going to be good for risk assets.
In all likelihood, this number comes in the “Just Right” range and further solidifies that a rate hike in September is coming, although unless it’s “Very Hot” it still won’t be regarded as a certainty until the August number hits (Sept. 4).
The jobs report has the potential to materially shift the outlook for stocks, and correctly understanding the implication of tomorrow’s Jobs Report will be key to protecting client portfolios and outperforming for the rest of 2015.
Paid subscribers trust us to tell them what they need to know about the jobs report – and to tell them whether it’s a bullish or bearish catalyst. So, they can spend more time with current clients and prospects. They know we have their back.
They also know the two leading indicator ETFs we are watching to tell us when this market will bottom (and neither have sent that signal – yet).
We Find the Leading Indicators
1. In January 2014, when the S&P declined 7% in three weeks, we correctly identified that emerging market currencies were the “reason” for the drop, and identified the Turkish Lira as the key indicator to follow. When it bottomed, stocks bottomed, and our subscribers knew it.
2. Last April, when the S&P 500 declined 4% in two weeks, we alerted our subscribers that the “momentum” sectors of internet stocks and bio-techs were responsible for the drop, and specifically identified QNET and NBR as two leading indicators to watch. When they bottomed, stocks bottomed, and our subscribers knew it.
3. During the September/October declines, our subscribers knew junk bonds (and the ETF JNK) were the leading indicator for the market. When JNK bottomed, so did the market.
4. Recently, as early as November we told our subscribers that oil, XLE and the Dollar Index were the leading indicators of markets, and until the first two stopped declining and the later stopped rising, stocks would be under pressure.
Our ability to identify key leading indicators has had a direct benefit to our subscribers, and I know that because they’ve told me. One subscriber (an FA at a bulge bracket firm) wrote to us saying:
“Thanks for your continued insight; it has saved my clients over $2M USD this year…Keep up the great work,”
We watch all asset classes to generate clues and insight into the near term direction for stocks, and while we are happy stocks are grinding relentless higher, our job is to remain vigilant to the next decline.
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Editor of The 7:00’s Report