April jobs report lifts stocks, S&P 500 again near all-time high

To minimize risk and get the lifestyle you want by utilizing a car means purchasing and maintaining a safe car, using the seat belts and driving safely. To get the lifestyle benefits (more money) from investing in growth assets, such as shares and property, time is the equivalent of a safety belt. – Paul Clitheroe

In what could be described as the perfect employment report for the stock market, investors piled back into stocks after the jobs data was announced on Friday and the S&P 500 Index closed near its all-time high. The Labor Department said that the U.S. added 223,000 jobs in April, in line with expectations, and also revised down the number of jobs created in March from 126,000 to 85,000. The unemployment rate dipped to 5.4% from 5.5% in the previous month, suggesting that the labor market continues to improve. Wage growth was also modest and indicated that workers’ pay was just keeping up with the level of inflation. This report provided the ideal backdrop for stocks as it was strong enough to calm investors’ jitters that economic growth had ground to a halt as evidenced by the anemic 0.2% GDP growth in the first quarter.  It also wasn’t too strong as to stoke fears that the Federal Reserve would raise interest rates before September, which is when most economists now predict the rate hike will occur. Indeed, investors could not have asked for a better jobs report, even after Federal Reserve Chair Janet Yellen commented earlier in the week that equity or stock market valuations were “quite high”, although she saw no evidence of a bubble. It will be interesting to see if there is any follow-through this week in stock prices or if they trade lower and become stuck in an all-too-familiar trading range of between 2,040 and 2,120, a threshold that has provided a very strong resistance level for the S&P 500 Index. With about 90% of companies in the S&P 500 Index having already reported first quarter earnings, it’s unclear what will be the catalyst to move stocks higher in the near-term.

Last Week

The April employment report was the highlight of the week in terms of potential market-moving data, but there were also other economic reports that deserve mention. Factory orders for March increased 2.1%, which was the biggest increase in eight months and better than expectations. The March trade deficit ballooned to $51.4 billion and was the largest since 2008 as imports surged. As a result of this increase, it’s likely that revised first quarter GDP will show that the economy actually contracted. The April non-manufacturing or services ISM index was strong as it registered a 5-month high.

Crude-oil futures briefly eclipsed $60 a barrel last week, the highest level in five months, even though oil inventories remain relatively high. Lower oil prices have increased demand and the summer is normally a period of seasonally stronger demand, which could lead to even higher prices.

For the week, the Dow Jones Industrial Average rose 0.9% to close at 18,191 while the S&P 500 Index climbed 0.4% to close at 2,116. The Nasdaq Composite Index finished basically flat to close at 5,003.

This Week

Retail sales for April will be the primary attraction this week and estimates call for an increase of just 0.3%, less than the previous month as automobile sales are expected to be weaker. As the effects of the harsh winter weather become less and less, the retail sales numbers should begin to show gradual improvement. The produce price index (PPI) for April is expected to increase modestly and show little or no inflation pressures. April industrial production is forecast to remain flat.

As the quarterly earnings season winds down, the most notable companies scheduled to report this week include retailers Kohl’s, Nordstrom, J.C. Penney and Macy’s and technology firms Cisco Systems and Applied Materials.

Portfolio Strategy

One of the primary reasons for the recent volatility in both the U.S. stock and bond markets has been the turbulence in the European bond markets. Much of this upheaval can be attributed to an improving economic outlook for Europe and the elimination of any immediate deflationary concerns. More than anything else, the rise in the yield of the German Bund, the equivalent of the 10-year Treasury note, from literally near zero in mid-April to 0.8% last week, was the catalyst that sent bond prices falling and yields rising. In a ten day span, the yield on the 10-year Treasury rose from 1.9% to 2.3% last Thursday, despite the fact that economic data such as first quarter GDP was surprisingly soft and comments from the Federal Reserve were mostly dovish. The Goldilocks employment report on Friday, neither too hot nor too cold, served to settle the bond market down and calm jittery nerves. The U.S. bond market followed the lead of the 10-year German Bund, whose yield had fallen back below 0.6%, which, in turn, sent S&P 500 futures higher and resulted in an increase of over 1% in the index for the day. The 10-year Treasury yield also ended lower at 2.15%. While Janet Yellen’s remarks about high equity valuations caught investors by surprise, they also could serve as a warning that interest rates might be raised to throw cold water on a hot stock market. If higher bond yields across the Atlantic Ocean in Europe can rattle the U.S. bond market, it isn’t too far-fetched to think that the Fed could hike rates for no other reason than to dampen investor enthusiasm for stocks. If anything, the recent volatility in bonds should remind investors about the importance of interest-rate risk and that the best way to reduce this risk is to shorten the duration of fixed income investments in a portfolio.