April 7, 2017

Stocks opened flat this morning, which is a wonder given the payroll report and last night’s missile strike in Syria. Unlike yesterday, the defensive sectors of the stock market are leading (utilities, telecom, consumer staples). Among the cyclicals, only semiconductors and defense contractors are in the green. The VIX Index is trading up to 13.2. Not surprisingly, gold is up on the day and WTI crude oil is up to $51.90/barrel. Bonds are trading up in price, down in yield as you would expect given the events listed above. The 5- and 10-year Treasury yields are down to 1.86% and 2.33%, respectively. 

According to the Bureau of Labor Statistics, the US economy generated 98,000 new jobs in March. Unfortunately, that tally was far lower than economists were anticipating (219,000). In addition, February payrolls were downwardly revised by 16,000 to 219,000 total jobs. So the headline numbers were disappointing, but the market will probably shrug it off because the shortfall was mostly due to weather. There were some positives in the report. The unemployment rate fell to 4.5%, the lowest rate since May 2007. The under-employment rate fell three-tenths to 8.9%, the lowest since the end of 2007. That is a clear sign that the labor market is tightening. The labor force participation rate held steady at 63%. Average hourly earnings growth decelerated to 2.7% as expected. And the average workweek fell to 34.3 hours due to weather. In my view, a Goldilocks (not too hot, not too cold) payroll report is probably a bit of a relief for investors, since it confirms that inflation, while rising, isn’t rising rapidly. And therefore there’s no need for the Federal Reserve to accelerate the pace of monetary tightening. 

Bob Doll of Nuveen Asset Management talked about his near-term outlook for the market in a CNBC interview yesterday. “There’s not a lot of downside,” primarily because corporate earnings are OK. But maybe the market needs to take a rest here for a while. He believes there’s a lot of cash on the sidelines waiting for a pullback before it can be invested. And that means any market correction should be short and shallow. He says about 2/3 of market rally since the election is due to improving economic conditions and corporate earnings, and about 1/3 is related to hope in President Trump’s pro-growth policies. 

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