Back to the day job: Nonfarm Payroll and equity markets

by George Hatjoullis

English: Spiked rods of uric acid crystals pho...

English: Spiked rods of uric acid crystals photographed under polarized light from a synovial fluid sample. Formation of uric acid crystals in the joints are associated with gout. Español: Cristales de ácido úrico de una muestra de líquido sinovial visto con luz polarizada. La formación de cristales de ácido úrico en las artiulaciones se asocia con una enfermedad llamada gota. (Photo credit: Wikipedia)

The events in Cyprus have been devastating for the people of the Republic of Cyprus but have barely been noticed by equity markets world-wide. However, one market in particular, the USA equity market, may be facing its own small moment of truth today. The release of the USA Nonfarm payroll data is always a ‘market event’ and has potential to elicit some material moves that can set the tone at least for the following month. Who cares? Pretty much every professional investor and not a few amateurs. I am classifying professional as those paid to look after other people’s money and amateur as those managing their own. It is not meant to be a judgement on ability!

S&P 500 closed at 1560 and is trading down in the futures market ahead of the release of the Nonfarm payroll data at 1.30pm UK time. The consensus forecast from economists appears to be around a +200k. The all time high for the S&P 500 is 1576 (or thereabouts). It last reached such levels in March 2000 and October 2007. In both cases rather ugly bear markets followed. A lot of investors are aware of this and are watching the S&P 500 closely. To move to new highs and trend up from there is a major event and would break the remarkable range of the last 12 years. Does the USA economy, and by implication the global economy, justify a new bullish trend?

For many the economic jury is out. If the S&P 500 can establish itself at new highs it will attract a major asset reallocation and new bullish trend may ensue. However, the event that will push it through this important ‘psychological’ level remains to materialise. In the meantime, nervousness builds and precautionary shorts accumulate. The only thing that is certain is that the S&P 500 cannot flirt with this level indefinitely. If it cannot make new highs then a correction will ensue soon.

This brings me back to today’s NFP report. Market sentiment is a little like gout. You can have very high serum uric acid but not experience a gout attack. Then a seemingly innocuous event, usually some food or drink, can trigger crystallisation of the uric acid in the joints and excruciating pain ensue. In mathematical terms crystallisation is a chaotic event in the terms of chaos theory. It is very sensitive to initial conditions and small pertubations can trigger a dramatic change. So it is with markets. Certain data releases can crystallise sentiment and set off enduring trends.

It is by no means certain that today’s NFP will be such an event. It is however clear that market serum uric acid levels are very high and conditions for crystallisation are propitious.