Remember, I am neither a bear nor a bull, I am an agnostic opportunist. I want to make money short- and long-term. I want to find good situations and exploit them. – Jim Cramer
In a holiday-shortened week, the stock market closed slightly higher as economic data provided mixed signals on the whether or not the economy is strengthening or weakening. The most important piece of potential market-moving data was released on Good Friday, though, when the stock market was closed and the bond market closed early. Unfortunately, the news was not positive as the Labor Department announced that nonfarm payrolls rose by only 126,000, about half of the number of new jobs that had been expected. The unemployment rate managed to remain the same at 5.5% but the unexpected drop in new jobs caused the bond market to rally and stock futures to fall. It’s safe to assume that Monday could be a volatile day for the stock market. Although the jobs data is often subject to revisions later on, the magnitude of the decline was shocking as investors had grown accustomed to payrolls in excess of 200,000. Investors should have been forewarned by the ADP private sector jobs report earlier in the week which saw only 189,000 jobs created in March, far fewer than expected. But jobless claims reported on the next day showed a drop of 28,000 to only 268,000 for the week, much better than expected and consistent with the view that this economic slowdown would be temporary and that the labor market continues to expand. If investors are looking for excuses for the disappointing jobs number, there are plenty to choose from. A strong dollar, weak energy prices, tepid overseas demand, a now-settled labor dispute at West Coast ports and even bad weather are a few that come to mind. While the weak jobs data will likely further postpone any Federal Reserve interest rate hike, it will do little to inspire confidence that economic growth will accelerate or that stock prices can resume their upward trend.
Excluding the disappointing employment report last week, the rest of the economic data was both good and bad. Consumer spending and incomes both increased in February and the National Association of Realtors reported that the index of pending home sales rose to the highest level since June 2013. The S&P/Case-Shiller Index also showed that home prices rose in January, but the increases were running about twice as fast as wages, which could be problematic. The Markit U.S. manufacturing purchasing manager’s index (PMI) also showed that the manufacturing sector had regained momentum and February factory orders recorded their largest gain since July. On the negative side, the Chicago PMI increased slightly but remained below a reading of 50, signaling contraction. Construction spending in February also declined slightly and the number reported in January was revised lower as well.
The U.S. trade deficit fell to its lowest level since October 2009, but was the result of a much lower level of imports rather than an increase in exports, a sign that the economy remains sluggish and that a strong dollar makes U.S. exports more expensive.
For the week, the Dow Jones Industrial Average gained 0.3% to close at 17,763 while the S&P 500 Index also added 0.3% to close at 2,066. The Nasdaq Composite Index edged down 0.1% to close at 4,886.
With very little in the way of economic data on the calendar this week, investors will rely on comments by two Federal Reserve presidents for clues about future monetary policy and insights about the economy. Richmond Fed President Jeffrey Lacker, who last week predicted that the Federal Reserve would raise interest rates at their June meeting based on strong growth and rising inflation, may be singing a different tune this time after the surprisingly weak March employment report. William Dudley, president of the New York Fed, will also give a speech.
The first quarter corporate earnings season will officially begin this week with Alcoa kicking off the festivities on Wednesday. Other companies that are on the earnings calendar include Walgreen, Family Dollar Stores, Bed Bath & Beyond and Constellation Brands.
For those investors worried over a possible June interest rate hike, the weak March jobs data will go a long way toward dispelling that notion. And for those economists and prognosticators who predicted that interest rates would rise this year, it is now the second year in a row that they have been wrong. After starting the year with a yield of 2.17%, the yield on the 10-year Treasury has fallen to 1.81% as of Friday. The overall softness of recent economic data coupled with the disappointing employment report last week have led many to believe that a rate hike may not happen until the end of the year or even later. For this reason, it would be wise for investors to maintain their bonds and bond funds as yields will probably stay the same or even go lower. Bond yields move inversely to bond prices, meaning that as yields fall, prices rise. The Federal Reserve has maintained all along that any decision to raise interest rates would be solely dependent on the economic data that is forthcoming and that the markets would be given ample notice. It’s entirely possible that the recent slowdown in growth is temporary, owing to the effects of a strong dollar and weak global growth. But it’s also possible that gross domestic product (GDP) could have dipped below 1% in the first quarter and remain low in the second quarter, in which case the yield on the 10-year Treasury could fall even further.