Spring came late this year in the Northeast as a late March blizzard threw off the normal seasonal rhythms. But now the trees are green, the flowers are blooming, and allergy sufferers—of whom there are several at home—are downright miserable.
The economy, too, has gone through a long winter. But with Friday’s jobs report, well, spring may have sprung.
Employers added 211,000 new jobs in April, well above consensus estimates of 185,000 and more than 2 ½ times March’s revised figures of 79,000 new jobs added. It marks the third out of the first four months this year in which job growth topped 200,000. Average job growth over the past three months was 174,000, pretty much in line with last year.
Even more impressive, the unemployment rate fell to 4.4%, the lowest it’s been in a decade, since before the financial crisis. That was as low as it got in the last economic cycle, so if this isn’t full employment, what is?
I can see at least two possible outcomes here.
Up one day, down the next, then up again, then down. That’s how stocks have been behaving lately.
And don’t blame the usual suspects. The Federal Reserve is on a clear course to gradually—the word Fed Chair Janet Yellen has been using for the last couple of years—raise interest rates, which remain historically low.
The big question hanging over the Fed, of course, is how to shrink its $4.5-trillion balance sheet, which it built through massive bond buying after the financial crisis. But the central bank is likely to be even more cautious with that.
The second big pillar of stock performance—earnings—have been doing just fine. Sheraz Mian of Zacks wrote that as of Wednesday first-quarter earnings are ahead of expectations, as 75% of companies in the Standard & Poor’s 500 index reporting thus far have beaten earnings estimates and 54% have topped sales expectations. Mian expects earnings for S&P 500 companies to be up 8.6% over last year. That’s the best quarterly performance in quite a while.
So, with the Fed moving slowly and earnings rising strongly, stocks should be advancing, right?
But they’re not, so we need to look at the un-usual suspects.
Markets are closed for Good Friday, but it’s not a federal holiday so the U.S. Census Bureau and Bureau of Labor Statistics are busy issuing data. They probably should have taken the day off.
The consumer price index fell by a seasonally adjusted 0.3% in March, the first time it’s dropped in 13 months. Economists polled by Econoday expected it to be steady, so that was a huge, shocking decline. Some people blamed a 6.2% drop in gasoline prices, but the core rate, which excludes food and energy, also fell by an unexpected 0.1%.
And retail sales fell by 0.2% in March, powered largely by the third consecutive monthly decline in auto sales. Also, February retail sales were revised sharply lower to -0.3%, making February and March the worst two-month stretch for retail sales in two years.
What does this mean and how will it affect markets?
That’s it for Republican health care reform plan. For now.
After an emergency meeting in the White House with President Donald Trump, Speaker of the House Paul Ryan pulled the American Health Care Act (AHCA) from a vote on the House floor.
The AHCA was the Republican leadership’s effort to repeal and replace the Affordable Care Act (ACA), or Obamacare, which was signed into law seven years ago Thursday. But it faced a mutiny by both moderate and conservative Republicans in the House of Representatives, and so the Speaker folded his cards rather than face certain defeat.
It was a major setback for the president in his first legislative effort, and for some pundits it called into question his ability to push through the ambitious legislative agenda that triggered the Trump rally on Election Day.
But markets, which sold off a little this week, reacted well. The Dow Jones Industrial Average, which was off more than 100 points earlier, rebounded a bit and closed down around 60 points. The Standard & Poor’s 500 Index closed down less than 1/10 of one percent. The Nasdaq Composite index actually closed up a bit.
So, some investors are looking on the bright side.
Federal Reserve Chair Janet Yellen broke little new ground at last week’s Federal Open Market Committee meeting, but if you listened closely, she made some news.
The FOMC raised the federal funds rate by 0.25% to between 0.75% and 1%, the third time the FOMC has hiked in the last 15 months. It also continued to insist it would raise rates three times this year. If it follows that script, fed funds would be 1.25-1.5% by the end of 2017.
But in her post-meeting news conference, Yellen expressed growing optimism. ”The simple message is the economy is doing well,” she said in plain English, a refreshing improvement over Fed-speak.
“We’re closing in on our unemployment objective, we’re coming closer to the inflation objective,” she said.
To me that indicates Yellen and the FOMC are turning their focus from employment to inflation, the other side of the Fed’s dual mandate. That implies “gradual” rate increases—at least three a year—for the foreseeable future.
What does that mean for markets?
The first full jobs report published during the Trump Administration came out Friday morning and I give it a B+.
The economy added 235,000 new jobs in February, slightly above expectations and about in line with January’s gains. Private sector jobs grew by a similar amount. The unemployment rate slipped to 4.7%.
Two things particularly impressed me about the report. First, job growth was strong across the board—not just in the usual suspects, health care and professional & business services, the two stalwarts of the service economy.
Construction—construction!—led the pack with 58,000 new jobs. Maybe February’s uncommonly warm weather gave early spring fever to home buyers and builders. Two wildly different industries—manufacturing and private educational services—also showed big job gains. Only retail, which is in the midst of a big contraction, showed a substantial decline of 26,000.
And labor force participation rose to 81.7% for the prime-age work force (people between 25 and 54). That was the highest prime-age participation since 2011.
So, is President Trump working some kind of magic? Is it good for investors?
When the stocks get so high
They go up to the sky,
Apologies to Dean Martin, who was a terrific singer but was content to play second fiddle to the Chairman of the Board, Frank Sinatra. Then again, who didn’t?
Sinatra, Martin and Sammy Davis Jr. were the three great talents at the heart of the Rat Pack. They ruled the Strip when Vegas was Vegas and men were men. No one was ever more politically incorrect—and no one ever had more fun.
The Rat Pack’s heyday coincided with the peak of the 1960s go-go stock market. Which is why I’m thinking of them now, when stocks are singing “Fly Me to the Moon” again.
Back then, Americans literally went to the moon. Today it’s only the Dow Jones Industrial Average, which hit an all-time high above 21,000 Wednesday following an address to a joint session of Congress by President Donald Trump that the punditocracy declared was “presidential.”
That, and the promise of big tax cuts, regulatory reform, and even infrastructure spending unleashed Wall Street’s animal spirits yet again. But is it for real?