Economic Expectations

Thursday is a big day for labor data. Let's look at a few estimates for this. We are getting the BLS monthly labor report and weekly jobless claims. It will be curious as to how the recent spike in COVID-19 cases impacts jobless claims. We might need to wait a couple more weeks to get a complete picture which means it’s possible we get a good report after we had 2 bad ones in a row.

Specifically, estimates are for initial claims to fall from 1.48 million to 1.4 million. That wouldn’t be a great decline. That’s a 5.4% decline which would be better than the past 2 reports, but nothing to signal the labor market is suddenly getting better at a much quicker rate. 

This consensus implies some cautiousness but doesn’t expect the hot spots for COVID-19 to run the data off track. That’s fair as weakness should show up in the following report. If this report misses estimates, it will be terrible. It will signal the labor market is struggling to improve. That would be a 3-week trend of poor improvement.

Consensus for the June BLS report is for 3.5 million jobs created which would be above last month’s 2.51 million jobs added. This leads to the unemployment rate falling to 12.4% from 13.3%. When asked to pick whether it will miss or beat estimates, we would say I expect a miss. This is obviously a very tough report to predict. 

The only month that was harder to predict was last month where results wildly missed estimates. That won’t happen again. Barclays expects 2 million jobs added, JP Morgan expects 3 million, and RBC expects 8 million. RBC will likely be very wrong and the other 2 will be close.

A guess for the stock market’s reaction is that a small miss will be ignored and a large beat will lead to a rally. It’s unlikely that stocks sell-off on Thursday. Way more people will be paying attention to markets this Thursday than usual. This isn’t a normal day before a holiday weekend. This is the 2nd most important labor report of the cycle. It could even be the most important if job creation misses estimates to the downside.

Fewer Companies Issuing Guidance

For the past few months, investors have been banking on the weak Q2 earnings season being washed away by encouraging guidance. In fact, something close to this occurred in Q1. Last earnings season, firms specified the latest sales data, showing us when activity bottomed. 

If reports had come a few weeks earlier, the latest results would have looked much worse. Now we have a clear picture of an improving economy which means there are heightened expectations for color on results which is bad news. Just look at the stock market to see how optimistic investors are about the future.

As of June 26th, 49 S&P 500 issued quarterly guidance which is down from 92 last quarter and the 5 year average of 106. Generally, the numbers have been consistent since 2015 with a steep drop off last quarter. Unfortunately, the original expectation for improved guidance won’t be coming. But firms will highlight the improving trends since the spring.  Of the 49 firms that issued Q2 guidance, 22 gave positive guidance and 27 gave negative guidance.

As you can see from the chart below, that ratio is much stronger than the 5 year average. That’s because only the firms with the strongest visibility issued guidance. This is survivorship bias; if the normal number of forms gave guidance, the data would be way worse. 

Companies doing the worst rescinded their guidance. Usually, a firm that is doing well has the strongest visibility or thinks it has the strongest visibility. The best view is from the top of the mountain. Sometimes the other side of the peak is a steep decline.

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On a sector by sector basis, tech had 16 firms give negative guidance which is below the average of 20.3. Healthcare had 4 which is below the average of 11.4. Biggest divergence from the mean was in consumer discretionary which had no firms give negative guidance which is below the average of 16.4. We all know this doesn’t mean they are doing well. They have extreme uncertainty.

Not Good News

According the news, COVID-19 is seemingly running rampant in the south and the west where states reopened too soon. Originally, it looked like the coast may have been clear because Georgia, which was the first state to reopen, didn’t immediately see a spike in cases. 

However, now we are seeing a spike just like many of the other southern and western states. 7 day average of cases rose from 657 on June 8th to 1,927 on June 29th. The good news is the number of deaths is extremely low. 7-day average is 19 which is below the peak of 42 in late April. Even with cases in America reaching new highs, the 7 day average of deaths has fallen from 834 on June 10th to 593 on June 29th.

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Spread is problematic even without an increase in deaths because people don’t want to get sick. This could lead to an elongated slowdown in restaurant sales. As you can see from the graphic above, in-person restaurant spending predicted new COVID-19 cases in the next 3 weeks. More spending meant more cases. 

On the other hand, higher spending at supermarkets predicted a slower spread of the virus. To be clear, the temporary slowdown in the recovery just means stocks will be range bound with added volatility. Many don’t see a return to the March low. The more stocks decline, the more optimistic investors get. If they price in more risk by falling, we get more optimistic because that means we get compensated for the uncertainty.