Sector Performance Before "The" Employment Report

Tomorrow we get the September employment report. This will be a market mover, but not in the traditional way. The stock market wants the Fed to keep cutting. So, if the employment gain is very good, the Fed will be less likely to cut at its next meeting, causing a market sell off. The same is true for a very bad report. Yes, the Fed would likely cut again, but this would signal the possibility that we might already be in the early stages of a recession, so the souring of profit expectations would overpower the effects of lower expected interest rates. Remember:

Stock prices = f(expected profit, interest rates)

So, when both factors change, the effect of one may well offset the other. That is the nature of forecasting! The ultimate change in stock prices will ultimately be determined by the changes in each factor and how sensitive stock prices are to those factors when their changes are that large (or small). This is a non-linearity -- the impact of each factor depends on its own level and how the other changes.

The next thing to look at is which sectors have performed well since the Fed rate cut in September. To do this, go to StockCharts.com. On the left side, click on Market Carpet. Under the heading Available Carpets, select S&P Sectors Carpet. You should see the image below (click to enlarge):

Step #1: Stretch the number of days bar on the bottom right (indicated in red typing on image). Move this to 13 days. NOTE: you can change both start and end date by dragging on either or both ends of this.

Step #2: When step #1 is completed (the days are correct), click on the button on the top left (indicated by the red typing in image). This will give a more aggregate overview, listing the sectors that have done best and worst over the time period you chose.


The result should be the next image (click to enlarge): NOTE THE PERCENT CHANGES IN EACH SECTOR (Highlighted in a reddish tint on bottom right).

There is a mixed picture since the Fed cut rates. The leading sectors are Materials, Technology, and Financials -- this signifies that the rate cuts have up to now apparently stimulated sectors related to growth. But Health Care, a defensive sector has done fairly well, while Consumer Discretionary, which we would have expected to be among the best performers is one of the slower performers (it was the only declining sector).

Note that on the left side of this Java Applet the sectors and their percent changes are noted over this period (which was summarized on the bottom left). If you double click on one of the gray headings you get a breakdown of that sector and the bottom right list shifts to the best and worst performers in that group.

Try double clicking on Consumer Discretionary. Let's see who has been holding this back, making its growth less than expected. Look at the bottom 5. What has been slowing this sector down to less than expected? How does this information alter you view (if at all) about growth prospects.

Tomorrow "the" report on employment is released at 8:30. I encourage you to see how the above results change. In general, when a major release occurs, read about it in the Carnes and Slifer text (Atlas of Economic Indicators), and check out the sector patterns to discern any rotations. What do these rotations indicate about growth expectations?

Finally, it is important to keep in mind that all of this note has pertained to the stock market only. To see how the bond market is viewing the world, look at the yield curve and how it has changed (go to Bloomberg.com for this or go to the Links for this blog under my picture). Has it steepened or flattened (or possible inverted)? Finally, check out the dollar's exchange rate with other countries and its index ($USD). What does the world think about how this report has altered growth prospects here? You can also check out www.dailyfx.com for exchange rate information.

This weekend I will post a follow-up note after the employment report has been released.