US Economy and Stocks Flying High?

Patti Domm of CNBC reports, Those recession fears now seem way overblown after ‘scorching’ jobs and manufacturing data:

January’s super strong jobs report and a solid manufacturing survey on Friday showed that recession worries may be overblown and slowdown fears are not impacting corporate hiring or dampening manufacturers’ sentiment.

The economy added a surprising 304,000 new jobs in January, well above the 165,000 expected by economists. Wages grew by an annual 3.2 percent, and were even higher for nonmanagerial workers with a 0.4 percent monthly gain.

“The labor market is still scorching,” said Ward McCarthy, chief financial economist at Jefferies. “If you look at the payroll data, the economy continues to pound out job growth. Wage growth is for real.”

ISM manufacturing was 56.6, well above the consensus of 54.2, but the important new orders component rose even more to 58.2 from 51 in December. A number above 50 reflects expansion, and while off recent highs, economists had expected the number to slow down even more. Consumer sentiment was also reported Friday and was significantly lower at 91.2, but it too beat expectations.

“I think really it’s kind of the same story we took away from the [jobs report]. Even though the [Fed] committee was really dovish on Wednesday, things domestically are still pretty strong,” said Ben Jeffery, rate strategist at BMO. “This is both producer and consumer sentiment readings at good levels. ... It definitely runs counter to what Powell said his concerns were on Wednesday.”

The Federal Reserve on Wednesday strongly signaled that it was ready to pause in its interest rate-hiking cycle, and that its decision would depend on economic data and market conditions. The Fed also said it would review its balance sheet policy, suggesting it could end its program to shrink the balance sheet at some point. Investors have worried that the central bank could slow the economy with a tightening of conditions from both its rate policy and the balance sheet roll-down.

Now the fed funds futures market is pricing in a very slight chance of an interest rate cut this year even though the Fed still forecasts two hikes for later in the year, as do a number of economists. Prior to Wednesday, the futures were pricing a 20 percent chance of one rate rise in 2019.

‘Perpetual pessimists’

“The perpetual pessimists have been calling for the next recession since the last one ended, and at some point they’ll be right,” said McCarthy. “If we don’t get a trade deal, we could slow significantly but I don’t think we’re going into recession, and if we do get a trade deal we’re going to be growing again.”

McCarthy said the Fed’s actions show that it is hedging against potential negatives, like the trade wars, China’s slowdown, a government shutdown and a possible debt ceiling fight. Fed Chairman Jerome Powell affirmed a dovish stance when he briefed the media after the meeting.

The jobs report and ISM were even more important than usual because the partial government shutdown disrupted releases of some important economic reports. The economy is expected to be slowing, but it’s unclear how much. Fears of a recession weighed on the stock market in December, as investors worried about the Fed, China’s slowing economy and trade wars.

“Powell can’t catch a break today,” wrote Societe Generale economist Omair Sharif.

“It seems that the hand-wringing over a sustained sharp slowdown in the factory sector may have been a bit premature. To be sure, it certainly looks like it has moderated from readings around 59-60...but a 55.5 average the last two months is still a healthy figure that signals continued expansion in manufacturing, ” he added.

The unemployment rate ticked up to 4 percent from 3.9 percent, as more workers looked for jobs. December’s payrolls were revised down to 222,000 from 312,000, but November was revised higher to 196,000 from 176,000.

“Who is calling for a recession this year again? Whoever it is, you can forget about it after a picture-perfect jobs report to start the year off right,” wrote Chris Rupkey, chief financial economist at MUFG.

The government shutdown may have shown up in a jump of 500,000 in the number of people employed part-time for economic reasons, according to the Bureau of Labor Statistics.

Diane Swonk, chief economist at Grant Thornton, said the government workers and contractors, who also weren’t paid in the 35-day shutdown, may have found part-time jobs and temporarily boosted the total nonfarm payroll number.

The big surge in part-time employment likely includes contractors who worked for the government and other workers that were impacted in addition to government workers, she said. That could reverse and continue to muddy the employment data.

“They were doing more than Uber. They boosted the payroll data,” she said. “That’s basically someone going out and getting a job to pay their expenses. It’s more than just the government workers...The good news is a lot of them got some part-time work.”

But job growth is still running at a solid pace. “It’s still probably about 200,000. It’s still a good number. The composition was good with manufacturing and construction up. That’s always good,” she said. “These numbers show the consumer is still there to carry the day, for the moment...We’ll get a much better read as we get through the quarter.”

“If you look at the December [jobs] revision, and the number we got, it continues to show a firm trend,” said John Briggs, head of strategy at NatWest. “We haven’t seen recession fears spillover into the corporate hiring picture. It’s not as firmly solid as last month where you had every indicator, including the household survey strong. But it certainly pushes back recent concerns, at least on hiring.”

Treasury yields rose and stocks futures rallied early after the jobs report showed strong growth in leisure, construction, health care, transportation and warehousing employment. The 2-year Treasury yield, which reflects Fed policy, rose to 2.48 percent and moved to 2.51, its high of the session after the ISM report.

“Net, net, it’s full speed ahead for the economy this year if today’s blockbuster report on new jobs is to be believed, and we think it is,” Rupkey notes. “U.S. companies have not let up one bit on their hiring in response to risks out there in the world economy, chiefly China and Europe, the Federal government shutdown, the economic war with China. Nothing, but nothing is getting in the way of onboarding new employees to work the factory floors and staff the shops and malls across America.”

No doubt about it, January's jobs report came out a lot stronger than expected and suggests there's no recession in sight, at least not for this year. The ISM manufacturing figure close to 57 also doesn't suggest a recession this year.

As noted in the article, the government shutdown boosted part-time employment and this inflated the numbers, especially in leisure and hospitality, education and healthcare and construction, all of which recorded huge gains last month (click on image):

Nevertheless, even without the boost from part-time employment and even if you factor in the major downward revisions to December payrolls (quite odd to see such a drastic downward revision), US job growth is still running at a solid clip of roughly 200,000 jobs a month.

Even more impressive, Susan Jones of CNSNews reports, Labor Force Participation at Trump-Era High of 63.2% in January, noting this:

The number of employed Americans, 156,694,000, was slightly below last month's record (156,945,000), and the unemployment rate increased a tenth of a point to 4.0 percent.

But the labor force participation rate increased a tenth of a point to 63.2 percent -- the highest it's been on President Trump's watch.

In January, the nation’s civilian noninstitutionalized population, consisting of all people age 16 or older who were not in the military or an institution, reached 258,239,000 (lower than it was last month). Of those, 163,229,000 participated in the labor force by either holding a job or actively seeking one.

The 163,229,000 who participated in the labor force equaled 63.2 percent of the 258,239,000 civilian noninstitutionalized population.

The participation rate was 62.9 percent when Trump took office, and it has showed little change since then, as retiring baby boomers offset additions to the nation's workforce.

In a report released last week, the Congressional Budget Office said it expects the labor force participation rate to stay about where it is now for the foreseeable future. The highest it's ever been is 67.3 percent in 2000, when it began its steady downward drift.

The number of Americans not in the labor force -- meaning they were neither employed nor looking for a job -- dropped by 639,000 to 95,010,000 in January, a move in the right direction.

Wages continued rising last month: In January, average hourly earnings for all employees on private nonfarm payrolls rose by 3 cents to $27.56, following a 10-cent gain in December. Over the year, average hourly earnings have increased by 85 cents, or 3.2 percent.

Now, a lot of is being made about the increase in labor force participation rate but earlier this week, I discussed Ray Dalio on the limits of capitalism and noted at the end Noah Smith's Bloomberg article, Too Many Americans Will Never Be Able to Retire.

If most Americans can't afford to retire, the labor force participation rate will continue to rise. And if there is any progress being made in the opioid crisis which is having a sizable impact on workplaces, that too will boost the labor force participation rate.

But experts like Minneapolis Fed President Neel Kashkari warn it's very hard to predict where the labor force participation rate is headed and even harder to draw inferences from it on the output gap:

Not only is it very difficult to predict where LFP is headed, the notion that any deviation of actual LFP from our estimate of trend represents an output gap is becoming less and less credible. https://t.co/h6804T9XI3

— Neel Kashkari (@neelkashkari) February 1, 2019

Just to give you some international comparisons, in Japan, the unemployment rate fell to 2.4% in December and the labor force participation rate was 61.4%, an increase of 0.9% compared to last year (but Japanese workers can afford to retire in dignity, for now).

Anyway, the US and Japanese jobs numbers look great but I warn you, employment is a coincident indicator and as QNB notes, cyclical indicators suggest the global economy is slowing further (click on image):

And then there's the stock market. We had very decent earnings this week which is why the Dow posted a 6-week winning streak:

The Dow Jones Industrial Average posted slight gains on Friday after the U.S. government released jobs growth data that easily beat expectations.

The 30-stock Dow rose 64.22 points to 25,063.89 as Chevron, Exxon Mobil and Merck all closed higher. The Dow also posted its sixth straight week of gains, its longest since November 2017. The S&P 500 closed 0.1 percent higher at 2,706.53 as gains in the energy and tech sectors offset losses in consumer discretionary. The Nasdaq Composite declined 0.25 percent to 7,263.87 as Amazon shares fell.

The U.S. economy added 304,000 jobs in January, according to data released by the Bureau of Labor Statistics. Economists polled by Refinitiv expect the U.S. economy to have added 170,000 jobs in January. The report follows a 35-day U.S. government shutdown. It also marks the 100th straight month of jobs growth. Investors had been awaiting the report in search of clues about the state of the economy.

However, the report also included a sharp downward revision of December’s jobs gains. January’s wages also grew at a much slower-than-expected pace.

“There were definitely some gives and takes here with this report,” said Bill Northey, senior investment director at U.S. Bank Wealth Management. “Regardless of your perspective, there was something to find in it.”

Friday’s moves come after the major indexes posted sharp monthly gains for the month of January. Last month’s gains were the biggest for the Dow and S&P 500 since October 2015.

Wall Street also digested key earnings from companies like Amazon, Merck and Exxon Mobil. On Thursday, Amazon reported better-than-expected earnings and revenue for the fourth quarter. However, the company issued weaker-than-expected revenue guidance for the first quarter and warned about increasing investments. These concerns pushed Amazon shares down by 5.38 percent.

Merck, meanwhile, posted a better-than-expected profit and revenue, sending its shares up by 2.7 percent. Exxon Mobil shares rose 3.6 percent after the company reported better-than-expected earnings. Chevron also gained 3.2 percent on a stronger-than-forecast profit.

“The word I’m using to describe this earnings season is reassuring,” said Kate Warne, investment strategist at Edward Jones. The reaction to the earnings “is very good because it reflects that investors were more worried than the numbers reflected and companies are being rewarded” for posting better-than-expected results.

So far, more than 45 percent of S&P 500 have reported earnings this season. Of those companies, 68.1 percent have topped analyst expectations, according to FactSet.

“It’s been pleasantly surprising for us,” said JJ Kinahan, chief market strategist at TD Ameritrade. “We would have expected the tariff situation to weigh a little bit more than what it did, but I think the way that it weighed in was in what was unsaid than what was said. We did not hear any CEOs, so far at least, talk about capex spending. That goes back to the uncertainty around tariffs.”

Wall Street also kept an eye on trade talks between China and the United States. Both negotiating teams have said they made “important progress.” President Donald Trump also said he would soon meet with Chinese President Xi Jinping to try to reach a comprehensive trade deal. Stocks had taken heart from the possibility of top-level trade talks over the coming weeks, but the upbeat mood soon cooled when the White House insisted it sees March 1 as a hard deadline for a deal.

The moves Friday come after Wall Street posted its biggest January gain since 1987 in the previous session. Strong earnings and an indication from the Federal Reserve that it will pause rate hikes boosted investor confidence. The S&P 500 ended January up more than 7 percent.

Gains in January usually translate into a positive year for stocks. Since 1950, the S&P 500 has ended a calendar year higher 87 percent of the time when January ends up being a positive month, according to the Stock Trader’s Almanac.

Now, I must warn you, we're at peak earnings and the slowdown in global PMIs tells me it's as good as it gets for earnings and the US job market.

Sure, the Fed hit a big pause button earlier this week, basically took itself out of the picture for now, but it remains to be seen whether there's enough juice to propel stocks higher.

Zero Hedge posted a comment yesterday on how a Nasdaq meltup is dock as CTAs turn "100% max long," but judging from the performance of CTAs last year, I wouldn't get too excited about this.

Today, Zero Hedge came back to its bearish roots and posted a comment on how it's all a giant short squeeze and investors are rushing to pull money out of US stocks.

As I explained in my last comment of 2018, Making Stocks Great Again, there were major hedge fund and mutual fund redemptions going on late last year which led to heavy selling in December and the Mnuchin Massacre didn't help, but once the world's most influential allocators were done rebalancing, stocks would come back strong.

Yes, short covering helped but it wasn't the primary reason why stocks surged last month, never mind what Bank of America's Michael Hartnett wrote in that comment.

What are my thoughts now on stocks? The easy money was made,  as shown below, the S&P 500 ETF (SPY) is going to run into such major resistance very soon (click on image):

I even drew a picture to highlight what I mean.

Now, is it game over for stocks and we're headed back down to retest the December lows or will the CTAs and other leveraged funds smash through resistance as they go "max long" as the Fed hits the pause button?

Who knows. All I know is that the easy money was made and going forward, you need to be wary of the buyback bull and pick your stocks well to make money in this market, and I mean really well.

You're also going to have to pick your shorts well, especially if you're still charging 2& 20 for your leveraged beta alpha.

I'll give you a couple of examples of what I mean, and please don't take this as investment advice, it's just an example of some stocks I was looking at this week.

First, have a look at the 5-year weekly chart of NVIDIA (NVDA) as it's at an interesting level (click on image):

I like when stocks get hit after earnings and they remain above their 200-week moving average, it allows traders to set their stop loss at a level as they try to play the bounce back up to the 50 or 100-week moving average.

Admittedly, the chart above is hardly bullish as the weekly MACD remains negative. My friend Fred Lecoq thinks you're much better off swing trading Advanced Micro Devices (AMD) over the next six months (click on image):

He might turn out to be right, AMD had great earnings and its female CEO, Lisa Su, is one very impressive lady.

On the short side, I'm still harping on Boeing (BA) which had great earnings this week, driving its shares up near their 52-week high (click on images):

I know, Boeing is a great company, it's basically the global leader in a duopoly with Airbus, gets great subsidies contracts from the US government, but unless I see it making a new 52-week high and sustaining upward momentum, I remain short.

Interestingly, it turns out Boeing's big pension gaffe wasn't a gaffe but a blessing in disguise. Still, it defies all prudent pension fund rules and I'd be cashing in right now as the global economy sets to slow.

What about General Electric (GE)?  The company reported another quarter of stellar results and it seems to be on the right path to be the turnaround stock of the year, but I caution my readers not to chase its stock here (click on image):

GE had a terrible year last year so it wasn't surprising to see it sell off strongly in Q4 as investors dumped it for tax-loss selling. The bounce since those December lows was expected as sentiment was way too negative on it but looking at that chart, I wouldn't chase it here and would rather buy it above $14 once it breaks out from resistance to make a new high.

Are there other stocks I like and hate? You bet but I don't have time going through everything here and I've even slacked off on my StockTwits account where I'm posting less and less (it's a lot of work tracking AND sharing everything I see!).

I leave you with some tables from barchart.com. First, the top-performing large cap US stocks year-to-date (click on image):

Next, the top-performing small cap US stocks year-to-date (click on image):

And lastly, the top-performing US sectors year-to-date (click on image):

Not surprisingly, Energy (XLE) and Industrials (XLI) are leading the way this year but let's see if this continues till the end of the year.

Alright, I'm drained, I hope you enjoyed reading this comment and all the others I posted this week. As always, I ask all my readers to please donate or subscribe via PayPal on the right-hand side, under my picture. I thank all of you who take the time to donate, it's greatly appreciated.

Below, CNBC's Bob Pisani goes over today's market action and whether stocks can keep up this strong pace this month (I doubt it).

Second, James Bullard, St. Louis Fed President and current voting member of the F.O.M.C., joins "Squawk Box" with his analysis of the January jobs report. He's a well-known dove but listen to his comments, he explains why he's comfortable with the Fed's recent decision to pause rate hikes.

Next, Omair Sharif, senior US economist at Societe Generale, and Steve Liesman break down what the strong jobs report could mean for inflation, Fed hikes and the overall market.

Fourth, CNBC's Jim Cramer shares his game plan for the week ahead and tells investors that 2019 might turn out to be "surprisingly rewarding." I'm not as enthusiastic as he is so I'd remain cautious.

Lastly, my favorite interview of the week, Howard Marks, co-chairman of OakTree Capital, sat down with CNBC's Brian Sullivan earlier today to discuss his market outlook and the Fed's decision to hold rates. Great interview, listen to what he says about what happens if the Fed cuts rates later this year (he gets into it around minute 4:30 when Brian Sullivan asks him: "What happens if the Fed cuts rates?").