Major stock averages close mixed as jobs-related data softens

Before you invest, you must ensure that you have realistically assessed your probability of being right and how you will react to the consequences of being wrong. – Benjamin Graham 

The major stock averages were mixed in the holiday-shortened week as investors digested a plethora of jobs-related data that appeared to show the economy is slowing. The S&P 500 Index closed virtually flat while the technology-heavy Nasdaq Composite Index fell slightly over 1% and the Dow Jones Industrial Average ended the week modestly higher. All the labor market data pointed to a weakening economy and the most important of these, the March employment report, showed that 236,000 new jobs were created, in line with expectations but far lower than in previous months. But on the bright side, the unemployment rate dipped from 3.6% to 3.5% and the average hourly earnings rose just slightly and at the lowest level since June 2021. The Job Openings and Labor Turnover Survey (JOLTs) for February also was weaker than expected as it showed that available positions dropped by 632,000 from January, the first time that job openings have fallen below 10 million since May 2021. The total was much less than estimates as the ratio of job openings to available workers is now 1.7 to 1. It is another sign that the Federal Reserves’ efforts to slow the labor market may be working as it aims to bring down inflation to its target of 2%. Although the stock market was little changed last week, the weaker than expected economic data caused bond yields to decline as the 2-year Treasury yield fell to 3.93% and the 10-year Treasury yield dropped to 3.37%. (Bond prices and yields move in opposite directions). Recession fears have surfaced again and the Atlanta Federal Reserve echoed that sentiment last week when it lowered its GDP growth estimate in the first quarter from 3.5% two weeks ago to just 1.5% now.

Last Week

ADP reported that private payrolls rose by 145,000 in March, down from 261,000 in February and below estimates of 210,000. Weekly jobless claims fell 18,000 to 228,000 compared to a forecast of 200,000, but the previous week was revised higher by 48,000. The ISM manufacturing index in March was lower than in February and below estimates. It was the worst reading in three years and still below 50, indicative of continued contraction. The ISM services sector index in March also fell from its level in February and was below estimates, but remained above 50, the threshold for expansion.

OPEC announced that it was cutting its oil output and oil prices soared, recording their biggest gain in nearly a year.

For the week, the Dow Jones Industrial Average rose 0.6% to close at 33,485 while the S&P 500 Index edged lower by 0.1% to close at 4,105. The Nasdaq Composite Index dropped 1.1% to close at 12,087.

This Week

The core consumer price index (CPI) for March, which excludes volatile food and energy prices, is expected to increase slightly while the core producer price index (PPI) is forecast to be up by 4.3%, a slight decrease from the previous month. Retail sales for March are expected to decrease slightly and be in line with the drop in February.

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

Among the most notable companies scheduled to report first quarter earnings this week are JP Morgan Chase, Citigroup, Wells Fargo, Blackrock, PNC Financial Services Group, Albertsons, CarMax, Delta Airlines, and UnitedHealth Group.

Portfolio Strategy

This week kicks off the first quarter earnings season and the big money center banks will be the first sector to report their results. After the collapse of Silicon Valley Bank and Signature Bank in March, expectations for bank earnings are relatively low as many regional banks have been hurt by deposit outflows and loan growth is expected to slow as banks tighten lending standards. The technology sector will follow the financials this reporting season and after layoffs announced at some of the bigger technology firms, companies will likely discuss cost cutting measures going forward coupled with reduced earnings guidance. First quarter earnings for the S&P 500 companies are expected to fall about 5% year over year. Inflation data in the form of the consumer price index (CPI) and the producer price index (PPI) for March will also be watched closely to see if prices are continuing to soften. The Federal Reserve doesn’t meet again until May and expectations are for another 25 basis point (a basis point is one hundredth of one percent) hike in the federal funds rate, raising the rate to a range of between 5% and 5.25%. For now, a banking crisis seems to have been averted, although tighter credit and slower loan growth could help the Fed in its goal to lower inflation. But the Fed has penciled in another interest rate increase in May, which should be the last one as long as the inflation data cooperates. The markets, however, are predicting that the Fed will begin cutting rates as early as July as the economy slows to a crawl and the Fed is forced to revive it to prevent a hard landing.