S&P 500, Non-Farm Payroll data, tapering and the market narrative.
by George Hatjoullis
It is NFP day again. It was the highlight of my month after Volcker left office. Until then it had been the (weekly) money supply data. Always hard to predict the NFP data but often even harder to predict the market reaction. Today it all rather depends where we are in the tapering and market narrative. Tapering is coming before year-end. The Federal reserve has said so. It is most likely coming on September 18. Only extremely weak data outcomes could alter this expectation. A very weak NFP might cause some doubt. However, whether a very weak NFP would boost or crush the market is not so clear.
A very weak NFP might defer expectations of tapering. The market might like this. On the other it does rather cast doubt on the economic outlook. The market might not like this. Quite where the market narrative sits at the moment is hard to fathom. For what it is worth, I an inclined to the view that tapering is now fully discounted so a very weak NFP would not be positive for the market whereas a very strong one would be very positive. In other words the market narrative has moved on to seeing tapering as a response to the patient being healed rather than threatening the patients recovery. I suggested it would do so many blogs ago. Does this mean that one should buy the S&P 500 if good economic data persists? Yes but subject to two caveats.
September is seasonally a difficult month for the S&P 500. No need to take my word for this. Barclays Technical Research published a very convincing chart (see above, from Bloomberg data) on August 14. Seasonal patterns need not apply in any one year but it is a tendency worth noting. It fits with my own experience so I must take it into account. At best it does suggest the S&P 500 is a little more sensitive to bad news than good news for the next few weeks.
The bad news could be economic (disappointing NFP) or policy based. It could also be exogenous. The Syria situation is one potential source. It is complex and messy. A USA strike on Syria that is not sanctioned by the UN, however limited, opens up a can of worms. It is the unintended consequences that might destabilise an otherwise bullish market environment. The confrontation between the USA and Russia (maybe even China) could escalate. Iran may get sucked in to the conflict. Civil war may reemerge in Lebanon and Israel may see fit to act against Hezbollah. The permutations are endless. If September S&P 500 fits the seasonal pattern, then Syria is most likely to be the catalyst.
The good news is that once the dogs of war are back on their leash then the bullish scenario for S&P 500 will reemerge. This may not be until late October. Once again this would then fit the seasonal pattern very well. Entry levels may be important for peace of mind over the next two months. Buy-on-dips is a nice expression but what does it actually mean? For me it means you should already have some bullish exposure. However, leave yourself room to add. Finally, only think about adding and do not get panicked out of your strategy. Much harder to do than it seems when the situation arises.