“A dull jobs market was just what this market needed to get excited,” says The Wall Street Journal’s Aaron Back. Last Friday’s payroll data for August was OK, but not great. Employment rose by 151,000, a slowdown from recent months, and wage growth slipped to an annual pace of 2.4%, a six-month low. But stocks ticked up anyway, as the news means that the US Federal Reserve is highly unlikely to raise interest rates this month, and given November’s election, almost certainly won’t move until December.
That’s just as well, since central-bank liquidity is such a key driver of stock prices. Forget the fundamentals: US earnings peaked in 2014 and have struggled since, says Kopin Tan in Barron’s. The downward revisions to S&P 500 third-quarter earnings growth expectations suggest that the end of the multi-quarter profits slide has been delayed. Meanwhile, stocks are priced for strong earnings growth. The S&P 500’s forward price-earnings ratio is around 17, far above the ten-year average.
The rally isn’t going to end just yet, however. “While the Fed is prepared to temper the party by adding some mixer to the monetary punchbowl,” says Robin Wigglesworth in the Financial Times, “other central banks are still busy spiking it with Jägermeister, sake and gin.” So the overall liquidity backdrop is still positive. So the “buy the dips” strategy that has served equity investors well in the past few years is probably still valid. “The bears will have their day, but not yet.”