Solid ADP Report - Small Caps Selloff
The stock market continued its selloff on Wednesday. S&P 500 fell 0.65%, Nasdaq fell 0.93%, and Russell 2000 fell a whopping 2.01%.
Finally, the stock market has had a mini-correction as the S&P 500 is down 1.15% from its closing high on Friday.
As you can see from the table below, it’s common for the S&P 500 to have a double digit intra-year decline. The median decline is 13% since 1928. I don’t think the drawdown of 2.5% will hold up as the max for the year.
Now is as good of a time as any for stocks to correct after becoming so overbought. CNN fear and greed index is at 63 which signals greed. We still have further to fall before I can become bullish on stocks.
Solid ADP Report -VIX Spikes & Treasury Yields Fall
VIX was up 6.78% to 15.74. It has been increasing quickly after its record setting 10 week decline. Worst 2 sectors were healthcare and energy as they fell 1.47% and 1.28%. The only 2 sectors that went up on Wednesday were utilities and materials which were up 3 basis points and 0.2%.
After peaking on March 1st, treasury yields have been plummeting. The 2 year yield fell from 2.55% to 2.51% and the 10 year yield fell from 2.75% to 2.69%. That means the spread tightened 2 basis points month to date.
The difference between the 10 year and 2 year yield is still relatively high at 18 basis points. However, it’s interesting how close both yields have neared the Fed funds rate.
Current Fed funds rate is 2.4% which means the 2 year is 11 basis points higher and the 10 year is 29 basis points higher. One more hike could push the Fed funds rate above the 10 year yield. Treasuries clearly don’t believe the ISM and Markit services reports that the economy is recovering from its slowdown.
Solid ADP Report -Investors Are Still Bullish
A 3 day losing streak won't eliminate optimism in the stock market. Especially one where the S&P 500 falls slightly more than 1%. As you can see from the chart below, 52.9% of investors are bullish.
The percentage has increased for 9 straight weeks. Bull bear spread is 32.3% which isn’t extraordinarily high. A 5% correction should be enough to make the market no longer overbought. An increase in the bearish count and a decrease in the bulls would be ideal.
Solid ADP Report
February ADP report was solid. It showed a creation of 183,000 private sector jobs, which beat estimates for 180,000. Consensus expects the BLS report to show 170,000 private sector jobs created.
There was a giant revision to the January ADP report as it went from showing 213,000 jobs to showing 300,000 jobs. That follows the January BLS report. That report showed the creation of 304,000 jobs.
It would be interesting if the BLS report ends up showing a lower revision. Some skeptics think the ADP report got pushed higher to follow the BLS number to give it more legitimacy.
Personally, I follow the BLS report much closer. However, I always review the ADP report to help me gauge my expectations for the BLS reading.
Job growth should be great because the jobless claims reading was strong in the BLS’s survey week. I expect somewhere between 150,000 and 200,000 jobs created. Given the tight slack in the labor market, if the economy were to create 300,000 jobs per month, the labor market would be full by the end of the year.
It probably wouldn’t be a disaster if the labor market was full because of the broken Phillips curve. To be clear, the Phillips curve tells us inflation increases when the unemployment rate falls. If the labor market runs out of excess slack, there probably won’t be a spike in inflation. The only ramification would be that the economy gets limited by the number of people who enter the labor force.
Solid ADP Report - Job growth shown in the ADP report came mainly from mid-sized and large firms.
Small firms only created 12,000 jobs. In this category, very small firms lost 8,000 jobs and other small firms added 20,000 jobs. This is in tune with the weakening NFIB survey.
Bears are wrong to pounce on this weakness because the rest of the report was strong. Mid-sized firms added 95,000 jobs and large firms added 77,000 jobs.
Goods producing firms added 44,000 jobs and service providing firms added 139,000 jobs. Construction added 25,000 jobs. That could signal the housing market started to turnaround last month. Professional & business and education & health were the biggest job creators as they added 49,000 and 37,000 jobs.
As you can see from the chart below, there were only 4,000 leisure and hospitality jobs added. It was the weakest growth since September 2017 when the industry hemorrhaged jobs.
In the January BLS report, leisure and hospitality did really well. Therefore, if the industry’s job additions reverse, then the BLS report might not be great. That being said, few economists are expecting the creation 304,000 jobs again.
The sequential weakness needs to come from somewhere. It might just happen to come from leisure and hospitality. I don’t think this will be an issue, for Friday’s report. Since stocks have been declining recently, we could see a modest pop if the report beats estimates.
Solid ADP Report -Conclusion
The stock market is on a 3 day losing streak. It needs to fall a bit more to stop the overbought status.
If stocks decline and the BLS report is solid, it could be a good time to buy. A solid BLS report would signal consumption growth in Q1 will be decent again.
It’s not impossible for stocks to decline on a solid report as they also fell on the day the strong non-manufacturing ISM PMI came out. I’m also looking forward to seeing if the ECRI leading index had another year over year growth improvement.