Wall Street's Herd Mentality
As expected, today's Nonfarm Payroll number was just as bad as the ADP Payroll indicated it might be. Expectations were that 165,000 jobs were added in May. The reality is that we got only 54,000 jobs.
Soft patch, indeed.
The economy has been adding an average of 220,000 jobs for three months running. 54,000 is a big miss, big enough to push the unemployment rate up to 9.1%.
We will likely see GDP estimates for the full year get lowered. But that's not the only bit of data that will be affected. Expectations for housing and retail sales will be affected. Oil prices will likely get hit. The date for the first interest rate hikes will be pushed back. And we may (hopefully) see some form of "it's the economy, stupid" enter into the political debate.
*****We also might expect rising unemployment and slowing growth to hit big bank stocks especially hard. After all, more unemployment means that loan delinquencies should rise, and I don't think banks are prepared for that.
But then, bank stocks have already been hit pretty hard. If there was any indication that investors were anticipating weak job growth and a worsening of the "soft patch", we saw it in bank stocks.
The banks didn't participate in the recent rally and were the first to turn sharply lower. Interestingly, though, the banks are showing relative strength today.
*****While I find it difficult to be bullish on the big banks in the current environment, I am bullish on some select regional banks. I just recommended two regional banks with a strong history of stable growth and solid dividends for my High Yield Wealth readers. These banks avoided the excessive risk-taking that led to the financial crisis. They are paying 3.1% and 4.4% dividends. You can learn more HERE.
*****I am also focused on oil and tech stocks in the current environment. Oil stocks, especially, seem to over-react to the daily fluctuations of oil prices. This is especially true for the small exploration and production companies (E&Ps).
I expect oil stocks to be among the strongest performing groups once we start to see the end of the current "soft patch."
*****10-year Treasury bond yields have dropped below 3% for the first time since the depths of the financial crisis. Clearly, investors have sought out the safe haven of bonds. But now that yields are so low *(and prices so high), we should be looking for signs of money coming back out of the bond market in search of higher yields.
Bonds have rallied as we approach the end of QE2. While that may seem surprising, it fits my theory that bonds would rally as the Fed exits its QE2 buying program, because the purpose of that program was to send investors into stocks. As QE2 winds down, investors moved money out of stocks. And even though bonds may not be the most attractive investment right now, the Wall Street script says "out of stocks, into bonds."
Yes, Wall Street absolutely has a herd mentality at times. And that's why trends sometimes run for a ridiculous length of time, and it's why sometimes the market's moves can leave you scratching your head.
But knowing this can help give the individual investor a distinct advantage.
