January 4, 2019

The stock market gapped up at the open after an encouraging jobs report (see below). The Dow and SPX are currently up 650 pts and 3%, respectively. Tech—hated by traders yesterday—is the best-performing sector, up over 3.5%. The materials sector is up 3% in early trading. Transports—again, hated yesterday—are up over 3% as well. The VIX Index is back down to 22.7, exactly even with VIX January futures. Traders are wondering why, when the market is now routinely moving more than 2% per day, the VIX isn’t well into the 30s. It may no longer be an accurate reflection of market volatility. European markets will close up over 2% in today’s session. The Chinese stock market has stabilized over the last several days, so that’s good news. After the release of the jobs report this morning, the dollar strengthened and bonds sold off. Opposite of the recent trend, Treasury bonds fell in price but junk bonds rose. The 10-year Treasury Note yield climbed back to 2.66%, surging 10 basis points from yesterday’s level. Bond yields provide different signals depending on the economic & market situation. At this moment, rising yields will signal some relief that perhaps the economic outlook isn’t as dire as the bears think.

The Bureau of Labor Statistics’ Employment Situation Report was released this morning. The economy generated a much better than expected 312,000 new jobs in December. To put this figure into perspective, 200,000 is typically viewed as very healthy. In addition, November payrolls were revised higher by about 20,000 jobs. The unemployment rate (U-3) actually climbed back to 3.9%, but only because more people entered the workforce. In fact, the labor participation rate rose to 63.1% for the first time since the spring of 2014. Industries doing much of the hiring were education and healthcare rather than retail looking for temporary help over the holidays. That’s a good sign. Average hourly earnings accelerated to 3.2% y/y growth. So wage inflation is higher than expected. You may recall that a year ago, the stock market was petrified about 2.9% wage growth—in fact, that’s what sparked the early 2018 stock market correction. Well, no one cares now because the prevailing opinion is that the economy is slowing so inflation won’t be an issue. It just goes to show you that the market narrative is changing very rapidly. And market price action is really overly sensitive to that narrative.

Federal Reserve Chair Jerome Powell is speaking at the American Economic Association’s annual meeting today. As expected, he said the Fed will be patient and flexible with monetary tightening. “As always, there is no preset path for policy. And particularly with muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves.” He seemed to acknowledge that Fed expectations for an inflation spike were erroneous. Also, he acknowledged that there are no “asset bubbles.” In other words, there may be no need for interest rate hikes in the immediate future. That’s great news for investors, who are unclear as to how quickly the economy is slowing.

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