Stocks surge on strong March jobs data, trade optimism

On the other hand, investing is a unique kind of casino – one where you cannot lose in the end, so long as you play only by the rules that put the odds squarely in your favor. – Benjamin Graham

On the heels of a better than expected employment report in March, all three major stock averages posted sizable gains last week. The technology-laden Nasdaq Composite Index soared nearly 3% while the broad-based S&P 500 Index rose over 2%. The rally in stocks began on Monday when it was announced that U.S. manufacturing data was better than expected and China reported that its manufacturing activity rose at its fastest pace in eight months. This positive data was welcome news as recent economic data from both countries has indicated that their economies were slowing. Ongoing trade negotiations between U.S. and Chinese officials also resumed last week and reports suggested that the talks were going well and that a deal could be reached in the next month. They say that hope springs eternal and patience is a virtue and investors have maintained both character traits as talks have dragged on past the original deadline. During this time, though, stocks have continued to march higher as the S&P 500 Index has risen about 16% for the year, suggesting that a potential trade deal has mostly been priced into the market. Investors also breathed a sigh of relief last week when the March jobs data was released on Friday. The report showed that 196,000 new jobs had been created, compared to estimates of 175,000, and that the unemployment rate remained steady at 3.8%. The February jobs number of only 20,000 was also revised slightly higher to 33,000 and the strong rebound in jobs helped restore confidence in the labor market and the economy. Although wage growth increased only modestly, the average job gains over the first three months of the year stood at a healthy 180,000. In essence, this was a Goldilocks report in that it showed the economy was expanding at a moderate pace while slower wage growth would probably keep the Federal Reserve from raising interest rates anytime soon.

Last Week

In addition to an increase in the ISM manufacturing index in March, which was better than expected, construction spending rose for the third straight month, boosted by gains in both private and public construction projects. However, the March ISM non-manufacturing or services sector index recorded its weakest level since August 2017 but remained comfortably above 50, the threshold for expansion or contraction.

The Atlanta Federal Reserve revised its estimate for first quarter gross domestic product (GDP) to 2.1% and said that GDP growth for all of 2018 was 2.9%.

For the week, the Dow Jones Industrial Average rose 1.9% to close at 26,425 and the S&P 500 Index jumped 2.1% to close at 2,892. The Nasdaq Composite Index soared 2.7% to close at 7,938.

This Week

The producer price index (PPI) and the consumer price index (CPI) for March are expected to increase modestly and show that year-on-year inflation has increased less than 2% while import prices in March should also indicate that inflation remains contained.  The preliminary University of Michigan consumer sentiment index in April is forecast to remain high and approximate data in March. The Federal Open Market Committee (FOMC) releases minutes from its last meeting in March on Wednesday.

The European Central Bank (ECB) meets to review monetary policy and is expected to leave its key benchmark interest rate unchanged at minus 0.4% as growth prospects in the euro zone remain challenging.

The first quarter corporate earnings season begins this week and the calendar is light, with the most notable companies being JP Morgan Chase, Wells Fargo, PNC Financial Services and Delta Air Lines.

Portfolio Strategy

This promises to be the worst earnings season in nearly three years but you would never know it from the performance of the S&P 500 Index this year. Through the close of business on Friday, the S&P 500 has posted a total return of 16%, rather remarkable considering that first quarter profits are expected to decline nearly 4%. The reason for the strong performance can be traced to the progress being made in the U.S. and China trade talks and optimism that a deal will be reached, which would end tariffs, boost economic growth and lead to stronger earnings growth in the future. The stock market is forward-looking and not backward-looking and most strategists believe that the first quarter will mark the bottom for earnings this year. Earnings are expected to rebound modestly in the middle two quarters and increase nearly 10% in the fourth quarter. This positive outlook has propelled stocks higher and the S&P 500 Index is now less than 2% from its all-time closing high of 2,930 reached in September. Favorable economic data, stronger than expected first quarter earnings and improved forward guidance and a trade deal with China are several catalysts that could cause stocks to go higher and possibly make new highs.