The S&P500 closed the week essentially unchanged from the week before. Volume was very light……confirming the lack of direction in the price movement of the index. And volatility edged even lower, which suggests that the market is still very complacent about any potential downside risks.
The technical picture — due to the fact that the S&P closed unchanged — has also not changed much since last week. The S&P is still hovering near, but quite at, all-time highs, and the upward momentum has weakened considerably. In fact, four times over the last year, when the S&P has exceeded 2,100 it has failed to move materially higher and has always retreated, sometimes by only 100 points (late May 2016) and sometimes by 300 points (February 2016). So the S&P is still facing an upward breakout test—-to succeed in moving materially higher, it must decisively break out and over the 2,125 level and stay there. On the other hand, if last week’s loss of momentum continues to develop, then there’s a material downside that’s already been established earlier this year—down 300 points to the low 1,800’s level.
Last week’s economic reports were mostly weak, as usual. Chicago PMI missed badly, and is now in contraction mode. Consumer confidence plunged. The Dallas Fed manufacturing survey also plummeted. Construction spending went negative (it was supposed to rise). Factory orders missed expectations. ISM services also missed, but very badly.
The big story of the week was the US payrolls report, which turned out to be a complete disaster. Instead of rising by about 160,000 jobs, the report showed that only 38,000 jobs were created. This turns out to be the worst month for US jobs growth since September 2010! The problem obviously is that the biggest data point supporting the bullish economic view that the US economy is growing steadily if not robustly was monthly jobs gains (despite the fact that most of the jobs gained were low paying and un-benefited—think bartenders and waitresses) just got thrown out the window. If job growth evaporates, then the odds of an upcoming US recession begin to jump materially. Evaporating job growth means lower incomes to purchase goods and services, and lower purchases mean lower corporate sales and lower corporate profits, which unfortunately translates into corporate layoffs. As a result, we would see a self-reinforcing negative economic cycle ….. one that breaks after a lot of people have put out of work.
Remember, it’s been about seven years since the US was in its last recession—a big one that began with the global financial crisis in 2007. So based on 100+ year economic history, the US is—-today in 2016—-already overdue for another recession.
Based on last Friday’s payrolls report, it looks increasingly likely that this recession is just around the corner.