With the Q2 earnings season winding down and nothing major on the economic calendar in the coming days, the stock market may simply be lacking in catalysts. The service sector ISM reading coming out a little later today could be move the needle a bit, but it’s not material enough to have any lasting effect, particularly after last week’s mixed economic data.
Last week’s manufacturing ISM report was very strong, but that was more than offset by Friday’s soft jobs report. Not only the headline jobs tally came short of expectations, but the report’s internals didn’t provide any reassuring signs about economic ramp up either. Average hourly earnings, the work week and revisions to prior months’ data were all negative. Even the slide in the unemployment rate was mostly due to more folks leaving the labor force. Importantly, while the report failed to throw up any evidence of improvement in the economy, it wasn’t bad enough to stop the Fed from contemplating the ‘Taper’.
The way I see it, stocks appear priced for perfection. Investors seem to be hoping that everything – from the economy to corporate earnings and from U.S. interest rates to the international growth backdrop – will continue breaking out in favor of stocks. It has played out that way lately, with stock market investors not losing any sleep over recent the rise in long-term interest rates.
The calculus seems to be that improved economic growth and stronger corporate earnings will offset higher interest rates. But what if we don’t get the material uptick in the growth picture, but interest rates keep trending up in anticipation of monetary policy normalization. Nobody wants to contemplate this not-so-implausible scenario at this stage.