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July’s Employment Report Usually a Market Disappointment

July’s employment situation report, typically released on the first Friday of August, has largely been a market disappointment over the last seventeen years.

 

By Jeffrey Hirsch

 

DJIA(NYSEARCA:DIA), S&P 500(NYSEARCA:SPY), NASDAQ(NYSEARCA:QQQ), Russell 1000 and Russell 2000 (NYSEARCA:IWM) have all declined a majority of the time. Average, historical performance on the day has been negative with Russell 2000 declining the most, off 0.55%. Across the board strength in four of the last six years has improved average performance as the prior twelve year stretch was nearly all bearish.

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Yesterday’s ADP private sector employment report showed 219k jobs were added in July. This was well above the consensus estimate of 185k and the report also came with an upward revision to June’s number. This suggests that tomorrow’s employment situation report could be solid as well. Current estimates are looking for around 193k net new jobs being added in July and the unemployment rate is anticipated to decline to 3.9% from 4%.

Solid labor market numbers have become a double-edged sword for the market. More people employed means more money to spend, but it also puts pressure on inflation expectations and the Fed to continue to tightening monetary policy by raising interest rates. Higher rates are already starting to hit the housing market and have sent ripples through some emerging markets. Tariffs and isolationist trade policy is a real concern, but the Fed is the biggest risk to the economy. If they tighten too quickly or too much they run the risk of triggering a recession as growth remains fickle.

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