The jobs report and the market

The consensus of the economic tea leaf readers had the number of jobs being added in November at about 185,000. The highest estimate I saw had predicted an add of around 200,000 jobs. Then the actual numbers announced Friday by the Bureau of Labor Statistics (BLS) crushed even the most positive estimate with an increase of 271,000 jobs reported.

In addition to more jobs, the Reader’s Digest version of the rest of the report had more good news for the economy when higher wages and lower national unemployment were revealed.

We now have the unemployment rate at just 5.00%, a number the Wall Street Journal said is the lowest since 2008. Further, the so-called U-6 rate, which includes what are termed discouraged workers and part-timers looking for full-time slots, dropped to 9.80%. That compares to the top rate of 17.10% hit in 2009-2010. This unemployment drop came even with an additional 313,000 folks in the labor force. Total wages have grown by 4.60% year-over-year. That’s being reflected in the gains in spending by consumers we’ve seen. This is being partially reflected in the record high numbers of cars and light trucks being bought this year.

We did have another excellent economic report earlier last week when the October ISM non-manufacturing data for the services sector, which makes up over 70% of our economy, showed expansion for a 69th consecutive month. The headline reading represents the second fastest rate of growth back to late 2005.

The one not so good part in the report showed the labor participation rate, which reflects the effects of retiring baby boomers, easily available disability bennies and pretty generous student aid, remained at only 62.40%.

All in all, pretty dang good results, it appears to me. And yet…

The market

While the overall market closed Friday with gains for the sixth week, the day’s results were mixed. Investors have to wonder why the tepid response in the news was really that good. Let me try to provide you some insight.

On one hand, I see it as a continued result of the environment we’ve been laboring under for the past few years. The drag effects of high marginal tax rates on business, burdensome regulatory requirements, large transfer payments, uncertainty about monetary policy and, of course, the ghost of markets past, aka, 2008 – 2009. It’s been hard to work out of that quagmire of stuff.

On the other hand, it’s due to the fact that yes, it really does look as if the Fed will – finally – begin raising interest rates, moving now to a less loose status. It’s this realization that acted as a bit of a brake on Friday. The reason being that the trend of rising rates will definitely have an effect on different sectors. With year-end just round the corner, money managers have to now move quickly to protect gains in those companies and sectors that have done well these past few years and rotate into those which tend to fare well in a rising rate environment.

Short version; a lot of former favorites and good performers may be subject to selling pressure and lower prices. Keep this in mind as you see market gyrations over the next several weeks.

The strong dollar is one result of higher rates. Even though our rates won’t likely be rising a lot soon, the markets aren’t all about definites. They’re more about what I think of as the theory of relativity – market version. It’s whether things, such as earnings, are trending better or worse than previous results or, in the case of interest rates, higher or lower.

General effect of relatively higher rates

The dollar has already risen this year in anticipation of higher US rates. This move, along with slower demand growth, has helped push commodity prices lower around the world. Gold, for example, has now dropped to its lowest point in three months this past week. It’s also helped keep oil prices contained.

Sectors that are pressured by higher rates primarily include the bond markets, as rising rates tend to push down the values of existing bonds. High dividend paying shares can also be subject to selling as they tend to act as bond substitutes. As a result, they too tend to react negatively to higher rates. This was demonstrated by the utility sector being the worst performer on Friday, being down by about 3.50%.

Another negative effect may be that portion of a corporation’s earnings which are created internationally could be under stress. These specifically include consumer packaged goods, pharmaceuticals and manufacturers.

Additionally, companies that are capital-intensive, meaning that earnings can be negatively affected by higher interest rate costs, especially utilities and telecom firms, will probably see their shares being sold by money managers.

A big beneficiary of higher rates would be the banks. As rates rise, their earnings can definitely benefit from the amount of money they can make from the gazillion or so dollars they have on deposit.

Another sector which should continue to do well, regardless of rising rates, is technology because of the productivity gains it provides throughout the global economy to both individuals and companies.

Summary

The next Fed meeting takes place in mid-December. It’s then that we’ll find out just what the Fed will do with rates…and what the market really thinks about that.

Cheers!

Mike

Securities and Investment Advisory Services offered through KMS Financial Services, Inc.

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