Jobs – much ado about not much
In terms of results, and strictly from the perspective of where the indices settled the first quarter, there wasn’t much movement from year-end.
S&P’s data banks related that the S&P 500 Index had an increase of 0.44%. That makes nine successive quarters with gains…though this one was the smallest of them. By the way, with dividends, the total appreciation was 0.95%. The Dow Jones Industrials had the tail position, having closed about one quarter of one percent lower. The NASDAQ did the best, thanks to the techs and biotechs, adding 4% over the first three months.
If you look at the sectors within the S&P 500, you’d notice a range of results for the quarter. For example, Healthcare gained 7.70%, with the companies in the Consumer Discretion generating a 5.10% improvement. Toward the other end of the results spectrum, we had Energy being lower by 2.80%, with Utilities being down 5.70%.
And, regarding the current media focal point, the US dollar had its strongest quarter since 2008 appreciating by 9.00%. Both this result and, in my opinion, the drop in utilities are tied to the belief that the Fed will be raising rates. Regarding the dollar, the higher rate makes it a more attractive currency v. the rest of the developed markets. Utilities are seen as a bond substitute in that people have been buying and holding them for their typically higher-than-market dividend income. Rising rates increase costs for utilities as the industry is a huge user of money. Costs go up; profits and, ultimately, share prices can then go down.
Now, many are saying this latest non-farm payrolls, aka, jobs report, has taken the current conventional wisdom about interest rate timing and made it suspect…and the herd really doesn’t like uncertainty.
The very most important jobs report ever…
Well, at least since the last one and probably until the next one, at least. Sarcasm intended…
Here’s what I think.
126,000 jobs were created in March. The analysts and economic forecasters all totally whiffed on this as their consensus was for an expected addition of 244,000 positions. Whoops!
As Josh Brown observes, we’re likely going to see the reasons for the big miss as being, “…probably the same things that are going to be impacting the earnings season…the strong dollar hitting manufacturing, the port strike hitting manufacturing and the really awful weather.” Unfortunately, this won’t prevent this same crowd from creating “new and improved” forecasts in the future.
So, based on Friday’s initial bond and future market reaction, is this difference between 244,000 “projected” jobs and 126,000 real jobs a reason to run for the hills? Let’s insert a little logic into this, before coming to a conclusion. First, month-to-month numbers are likely to vary – in spite of expectations. More important, this “miss” equals just 0.08% of the total US workforce of 160 million. In other words, no meaningful figure.
What’s of far more importance than single month is the trend in annual employment growth. In the past three years, this growth has consistently exceeded 2% for the first time in 15 years. The rate of growth in March was higher than at the 2002-07 bull market peak in March 2006 and close to the highest rate of growth since June 2000.
So, what real difference to the economy can this jobs number make? Why try to forecast this? I have no idea. Jobs numbers are trailing indicators; the kinds that, in effect, tell you what you already know…
The market’s concern
The Federal Open Market Committee shall have had two more jobs reports to review by the time they meet in June. Unless they get a string of really bad reports, I doubt they’ll be changed in their commitment to come to a data-driven decision about when, if and/or how much to raise rates. With unemployment levels continuing to move to lows not seen since before the most recent recession, I don’t see how – barring more collective bad economist math – the numbers should continue badly.
I think the market’s real concern is about first quarter earnings. These will be starting to come out a couple weeks from now. The concern is that the depth and range of effects of the events Josh mentioned above are really largely unknown. Add to that mix the push/pull of lower oil prices on different industries. What this becomes, from a trader’s point of view, is a regular whirlpool of choices and potential outcomes.
A lot of companies, especially those big multinational ones, are likely going to see earnings drop due to the dollar’s strength. The dollar could continue to strengthen even more when the Fed moves rates up, especially as most other central banks are lowering their rates. (That’s because the higher dollar makes our “stuff” relatively more expensive elsewhere in the world so sales drop lower.) This would probably move their share prices lower. Should that happen, and if I were a long-term stock or fund investor, it could very well inspire me to invest in order to benefit from the markdowns. It’s a good part of the cyclicality of the markets.
So, with rate raising seemingly on hold for a while longer, the dollar may weaken a bit – good for those who are worried about its effect on the multinationals, etc. The lower global rates will also tend to help keep the Fed from moving too much in their initial steps. Look for a less loose(?) policy, as opposed to tight money.
Finally, look for continued volatility as the Fed and earnings reports will be the main market drivers for a while.
Cheers!
Mike
Securities and Investment Advisory Services offered through KMS Financial Services, Inc.
To get an overview of economic conditions, use this link. It’s updated monthly. http://www.russell.com/Helping-Advisors/Markets/EconomicIndicatorsDashboard.aspx
Past performance is not indicative of future returns.
Investing in securities of any type involves certain risks, including potential loss of principal. Investment return and principal value in a bond and/or securities portfolio will fluctuate so that investments, when sold or redeemed, may be worth more, or less, than the original investment.
Investing in sectors may involve a greater degree of risk than investments with broader diversification. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.
