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

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

*****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

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.

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