Stock Market Needn't Be Fearful Of Negative Payrolls
The text suggests that the initial negative payrolls report may not be the most harmful to equities, implying that subsequent negative reports could have a greater impact.
Written by Bloomberg macro strategist, Simon White,
The monthly payrolls report is not expected to show a decline for a few more months, but when it does,
stocks usually perform better overall compared to when the reports are positive.
The leading data continues to forecast a persistent decline in annual payroll growth.
For example,
the significant decrease in banks' readiness to provide consumer credit is a growing obstacle in the upcoming months.
If the rate of payroll growth continues to decline as it has in the past six months, we could see the first negative monthly change in December.
However, this could happen sooner if the decline rate accelerates (as the above chart suggests might occur).
Furthermore, temporary help is already shrinking on an annual basis and the average weekly hours worked continue to decrease, indicating that employers are running out of alternatives before they need to start laying off employees.
This kind of dynamic implies that job losses can increase rapidly as pressures have been accumulating beneath the surface.
However, historically, negative payrolls have not been detrimental to equities.
Take into account the instances when the 3-month moving average of the initial estimate of the monthly change in payrolls is negative, and look at the future S&P returns. We find that on different timeframes (5, 10, 30 and 60 day), the S&P surpasses its average full-sample return over each period.
The situation is reversed when payrolls are positive.
Over each timeframe, the future return in the S&P is below its full-sample return.
It's not necessarily the first negative payrolls report that causes the most harm to equities
(unless it was extremely unexpected), but the large unexpected drops.
Job data is heavily delayed, and by the time monthly payrolls are solidly in negative territory (i.e. the 3-month MA is negative), stocks have historically moved on,
and are starting to anticipate the recovery.
As stated above, today's report is highly unlikely to be negative. But we should be vigilant for a downward miss (August does have a history in that regard).
And if it was significant enough, impulsive selling could overpower any 'bad news is good news' dynamic in the short term.