Strong jobs report & prospect of more stimulus power stocks higher

The mistakes we make as investors are when the market’s going up, we think it’s going to go up forever. When the market goes down, we think it’s going to go down forever. Neither of those things actually happen. It doesn’t do anything forever. It’s by the moment. – John Bogle

In the holiday-shortened week with the market closed on Good Friday, all three of the major stock averages posted gains as vaccines continued to be administered across the country and the White House unveiled a $2.3 trillion infrastructure spending bill. The technology-heavy Nasdaq Composite Index turned in the best performance as growth stocks rebounded from recent weakness while the S&P 500 Index closed above 4,000 for the first time ever. Despite the 10-year Treasury yield topping 1.77% early in the week, investors chose instead to focus on the positives of the massive infrastructure plan and the companies that stand to benefit from such huge spending. What investors failed to consider was the bad news of how to pay for this spending bill in light of the fact that a $1.9 trillion Covid relief package was recently signed into law. The plan now calls for the corporate tax rate to be raised from 21% to 28%, which could negatively impact corporate earnings in the future. More stimulus could also bring higher bond yields, rising inflation expectations and dismissal of the notion that the Federal Reserve will be on hold for the rest of the year with regard to not raising interest rates. Economic reports last week dealt primarily with jobs and, for the most part, the news was favorable. The March employment report showed that 916,000 new jobs were created, much higher than expected, and that the unemployment rate declined to 6% from 6.2%. The number of new jobs was also revised higher in January and February and the biggest gains came in those industries that had been most severely hurt by the pandemic, namely leisure, hospitality, construction and manufacturing. Although the jobs report was encouraging, there is still plenty of slack in the labor market that would preclude the Fed from raising interest rates any time soon.

Last Week

Other economic data related to jobs was not as favorable as ADP reported that private payrolls increased by 517,000 in March, higher than in February but less than expected while weekly jobless claims totaled 719,000, higher than the 675,000 that were expected. The ISM manufacturing index rose in March to its highest level since December 1983 and the consumer confidence index in March surged to its highest reading in a year.

For the week, the Dow Jones Industrial Average rose 0.2% to close at 33,153 while the S&P 500 Index climbed 1.1% to close at 4,019. The Nasdaq Composite Index surged 2.6% to close at 13,480.

This Week

The ISM non-manufacturing or services sector index for March is expected to be higher than in February and solidly in expansion territory but February factory orders are expected to drop modestly after a strong January. The producer price index (PPI) for March is forecast to increase by the same amount as in February and show that inflation remains under control.

The Federal Open Market Committee (FOMC) releases the minutes from its monetary policy meeting in March.

The only notable companies scheduled to report quarterly earnings this week are Paychex, Conagra Brands, Constellation Brands and Levi Strauss.

Portfolio Strategy

With the stock market closed on Good Friday, investors were not able to react to the surprisingly strong March jobs report but will get their opportunity this week. With only a few corporate earnings reports on the agenda and a light economic calendar this week, investors will likely turn their attention to what economists predict will be a very strong second quarter as the economy recovers and stimulus spending grows. As long as interest rates do not rise too quickly, the stock market should be able to add to its recent gains. On Friday, the 10-year Treasury yield settled at 1.69% after climbing as high as 1.77% early in the week on inflation fears. The yield on the 10-year Treasury is closely watched as it influences mortgages and other consumer loans and also has been negatively correlated recently with high growth technology stocks. As the 10-year Treasury yield has moved higher, technology stocks have traded lower. Along with much stronger GDP growth expected in the second quarter, first quarter corporate earnings should also be strong and companies should be more upbeat about earnings for the full year, leading to positive earnings revisions by analysts. Faster economic growth, rising earnings projections, historically low interest rates and pent up consumer demand should all be positives for the market and lead to further gains in stock prices over the near term.