What Does the Big US Jobs Miss Signal For Stocks?
Stocks rose to record levels on Friday even after a disappointing April jobs report as the weak number made investors believe easy monetary policies that powered the market’s historic rebound will stay in place for longer.
The S&P 500 climbed 0.7% to 4,232.60, hitting a record high. The Dow Jones Industrial Average rose 229.23 points, or 0.7%, to 34,777.76 to reach another closing high. The tech-heavy Nasdaq Composite popped 0.9% to 13,752.24.
The Labor Department said nonfarm payrolls increased by just 266,000 in April, far less than the 1 million total economists were expecting, according to Dow Jones. The unemployment rate rose to 6.1% last month amid an escalating shortage of available workers, higher than an expectation of 5.8%. Meanwhile, March’s originally estimated total of 916,000 was revised down to 770,000.
Investors bet that the big jobs miss could keep the easy policies of the Federal Reserve in place, including record low interest rates and a massive bond-buying program. Tech stocks, which have been winning under the low-rates regime during the pandemic, outperformed after the data release. Microsoft and Tesla both rose more than 1%, while Netflix, Alphabet and Apple all registered gains. Higher rates tend to hit growth stocks the most since they reduce the value of their future earnings.
“The Fed will feel some vindication in their hesitancy to embrace tapering,” Adam Crisafulli, founder of Vital Knowledge, said in a note following the jobs report Friday.
Bank of America research warned as recently as Friday that strong economic data could hit stocks, especially tech shares, if it caused the central bank to dial back on its easy monetary policies.Some believe that April’s jobs number could just be a blip and it shouldn’t change minds about the trajectory of the U.S. economy.
“It was a huge surprise,” Goldman Sachs chief economist Jan Hatzius said on CNBC’s “Squawk on the Street.” “I think that you always have to take every data release with a grain of salt and this one I think you may have to take with a rock of salt,” he said, citing seasonal adjustments as a potential source of error.
Still, the disappointing jobs number poured cold water on many economists who estimated a sharp rebound in job growth. Goldman Sachs economists expected a total of 1.3 million jobs to have been added in April.
It also cast doubt on whether the economy could pull off a full recovery from the pandemic as quickly as many expected. Some economists are forecasting double-digit growth in the current quarter after gross domestic product rose at a 6.4% annualized pace in the first quarter.
“It was a disappointing read on job creation and brings into question the assumption that Q2 is going to carry-forward the positive momentum established at the beginning of the year,” Ian Lyngen, head of U.S. rates at BMO, said in a note.
Shares of Roku rallied more than 11% after the streaming company blew past expectations with its first-quarter results. Roku posted adjusted earnings of 54 cents per share, compared to an estimated loss of 13 cents per share, according to Refinitiv. Revenue rose 79% from a year ago and exceeded expectations.
For the week, the Dow rallied 2.7% to break a two-week losing streak. The S&P 500 gained 1.2%, while the Nasdaq Composite shed 1.5% this week.
Patti Domm of CNBC also reports the stock market may be misreading what this weak jobs report means for the Fed:
The much weaker than expected April jobs report reinforces the Federal Reserve’s easy policy stance, but some strategists still expect the central bank to signal in the next couple of months that it will slow down its bond buying.
Economists had expected to see 1 million new jobs last month, so the government’s report of just 266,000 was a gut punch to the view that the economy is rebounding in a smooth upward trajectory. The anticipation for a big jobs number also had put the spotlight on the Fed’s easing programs.
Stock futures rose and Treasury yields immediately fell after the report. But the 10-year Treasury yield, after falling to about 1.49% turned around to trade at 1.55%. The 5-year also fell but stayed near its low. Yields move opposite bond prices. In afternoon trading, stocks remained higher with the Dow up about 160 points.
“I’m wondering if bonds are selling off a little as it just reinforces [Fed Chair Jerome] Powell wanting to be patient,” said John Briggs, head of global strategy at NatWest Markets. “But if you’re like me, waiting for the Fed to taper, I think the Fed is going to start talking about it in September. That means the market is going to be talking about it in the summer.”
Economists said the May jobs report will provide more information on the state of hiring, which could have been slowed by bottlenecks showing up in supply chains. For instance, auto workers have been idled due to the shortage of semiconductors needed to build automobiles. There is also an acute shortage of workers in some areas and industries. Economists also see closed schools as an issue, keeping parents from the workforce. To some extent, expanded unemployment benefits may also be a factor.
“If one is thinking about the evident labor shortages being inflationary, that should push the 5-year yield up,” said Michael Schumacher, Wells Fargo rates director. “But the other side is if you consider the chance of the Fed tapering, that’s been pushed back slightly. Not much in my opinion, but people might take that view.”
Schumacher said he still expects the Fed to discuss trimming its purchases of about $120 billion a month in Treasurys and mortgage securities.
Fed Chairman Jerome Powell has knocked the idea that the Fed will begin discussing an unwind any time soon. But some strategists still expect the Fed to be forced into slowing the purchases and ultimately ending them due to the strength of the economic recovery and the specter of inflation.
A step toward ending the bond-buying program would ultimately be a step toward raising interest rates, which the Fed is not expected to do any time soon. Powell has said the Fed would complete the slow wind down of its bond purchases before raising interest rates.
“If you’re an economy bull, you say this is probably an aberration. ... The bears can say you’re losing momentum. Either are possible until you get another month,” Briggs said, noting the next report could show a large amount of hiring. “When was the last time you reopened an economy in a pandemic? Where are your seasonal factors for that?”
He said the bond market is also reacting to the potential for more fiscal stimulus, highlighted by the White House after the weak number.
“It’s as simple as this — a drop in rates, let’s buy tech,” said Peter Boockvar, chief investment strategist at Bleakley Advisory Group. “The stock market can’t decide whether it wants to celebrate the drop in yields and maybe a Fed that’s not going to taper so quickly but at the same time, we’re early stage in the recovery but we’re seeing a lot of late stage behavior like supply demand getting hot ... this overheating.”
Jan Hatzius, chief economist at Goldman Sachs, said the bond market reversal appears to have come as traders looked at the inconsistencies and decided the number was distorted. “That was my view as well,” he said on CNBC. Hatzius said the weak jobs report does not change his view that the Fed will taper its bond purchases starting next year and then raise interest rates in 2024.
“I’m not sure having one dud report changes the calculation too much,” said Schumacher. “I suspect the forecast range will be astronomical next month.”
The unemployment rate rose in April to 6.1% from 6%. The bulk of hiring was in the leisure and hospitality sector, which added 331,000 jobs as pandemic restrictions on restaurants eased.
Average hourly wages rose by 21 cents to $30.17 in April, and economists note that strong hiring of workers in the hospitality industry typically makes overall wage numbers go down.
“This is a devastating disappointment, more than just seasonal problems. We had declines in everything from professional services to manufacturing and even couriers and transportation,” said Diane Swonk, chief economist at Grant Thornton. “Turning on the lights in the economy is harder than turning them off.”
And Jeff Cox of CNBC also explains April’s big jobs miss and what it means for the US economic outlook:
The stunningly disappointing April jobs report shouldn’t be taken as an indictment against the fast-moving economic recovery but shouldn’t be dismissed as merely a one-month blip either, according to Wall Street economists and market experts.
A confluence of factors helped explain the weak Labor Department count that showed nonfarm payrolls grew by just 266,000 in a month that forecasters had expected to see 1 million.
Among them: low labor supply caused by a lack of qualified workers, reluctance of some to go back to work because of Covid-related fears and the continuation of enhanced unemployment benefits, and seasonal factors that skewed expectations for job creation.
“The main thing we learned in this reopening trade was that we thought it was going to be this smooth trend of all this good stuff happening. What we’re starting to realize is it’s probably going to be a little bit bumpier,” said Jim Caron, head of global macro strategies for the Global Fixed Income Team at Morgan Stanley Investment Management.
“The road is still pointed in the right direction. It’s just going to be a little less smooth than we had thought,” he added.
Some positive signs amid the weakness
Despite the big miss, there were still things to like in the report that pointed to strong fundamental factors for the jobs market even if the headline number was a big letdown.
For one, the unemployment rate rose 0.1 point to 6.1%, but that was primarily because more Americans returned to the labor force, a critical metric for policymakers.
Also, the level of working remotely fell to 18.3% of those employed from 21% in March. Those who said they weren’t working because their employer closed or lost business due to pandemic-related reasons declined from 11.4 million to 9.4 million. Those prevented from looking for work due to the pandemic fell to 2.8 million from 3.7 million the previous month. The average duration of unemployment declined to 28.8 weeks from 29.7 weeks.
There’s also hope for the future: Economic growth is expected to get even stronger through the second quarter, and other real-time indicators like restaurant reservations, foot traffic and employment costs all point to continued employment gains ahead.
“This is just a blip. It’s one data point. I would not take a lot from it,” said JJ Kinahan, chief market strategist at TD Ameritrade. “This is one of those reports that is kind of interesting, but that makes the next report even more interesting, because something about this seems odd.”
Indeed, the financial markets weren’t disappointed at all.
Stocks rallied through the day and shorter-duration government bond yields fell, an indication that at least near-term inflation pressures were diminishing.
The market reaction was a bit puzzling, particularly the bond market moves, though there was an overall sense that any urgency the Federal Reserve may have felt to tamp down economic growth would be quelled further by the jobs situation.
“Time for a deep breath. One month’s data prove nothing; payrolls could rebound massively in May,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics. “But if the April report is indicative of [a] trend which will persist, then the rally in Treasuries after these data makes no sense, because the outcome will be substantially faster wage growth and the potential embedding of the impending reopening spike in margins.”
Lots of questions
Wages did accelerate during the month, rising 0.7% from March though flat year over year. The gains may have reflected added pressure on businesses to pay more in order to encourage workers to return to jobs.
The combination of higher pay and a slight decline in hours worked “suggests labor shortages are becoming more evident, which may in turn be a factor holding back jobs growth,” Capital Economics senior U.S. economist Michael Pearce said in a note.
“Overall, it is difficult to judge how much weight to put on this report at a time when most of the other evidence suggests economic activity is rebounding quickly, but it is a clear reminder that the recovery in the labor market is lagging the rebound in consumption,” he added. “That’s a crucial distinction for the Fed.”
Nationwide Mutual chief economist David Berson said the April numbers raise the question of “whether this relatively weak employment report is a sign of a weakening demand or a sign of lack of supply.” Within that question is whether unemployment benefits, which provide $300 above what recipients normally would get, are too high. He also wondered whether a skills mismatch is at play, if it’s a matter of schools yet to reopen, or if business start-ups are lagging.
“All of these probably are playing a role,” he wrote.
Krishna Guha, head of central bank strategy for Evercore ISI, said the report “can only lower conviction in the view that a very vigorous acceleration is already underway,” and he characterized it as “more supply-constrained stagflation lite than Goldilocks.”
Stagflation is a term to describe a 1970s-like economy where growth is low and inflation runs high.
But White House officials on Friday generally chalked up the report as indicative that more needs to be done, not less, to get the economy back to full power.
President Joe Biden said the numbers are “on the right track” but “we still have a long way to go,” while Treasury Secretary Janet Yellen said the report shows that there will be some bumps along the way.
Wall Street generally agreed, maintaining that the high levels of stimulus combined with continued progress against the coronavirus will spur more hiring ahead.
“My inclination is not to read too much into the weakness,” wrote Eric Winograd, senior economist at AllianceBernstein. “I remain confident that the economy is accelerating sharply and will continue to do so, and that the labor market will reap the benefits of that expansion sooner rather than later.”
Alright, it was another hectic Friday with the hugely disappointing nonfarm payrolls figures that came out earlier today.
While all eyes were on the stock market, it's the bond market which caught my attention today:
If you've been around markets long enough, you know that there are big surprises in the US nonfarm payrolls -- both positive and negative -- that pop up here and there.
This is why forecasting any US jobs number on any given month is next to impossible, most of the time you'll be in the ball park but sometimes, you'll look like a fool.
As far as stocks, the Nasdaq futures took off after the report as rates plunged this morning but gave back a lot of the earlier gains as rates came back up.
The truth is tapering is coming and the market is sniffing this out. Will it come in September, October or December? Nobody knows but they know that monetary and fiscal policy are overly accommodative and the party is going to end sooner rather than later.
You already see this with hyper growth stocks like Roku (ROKU) which rallied today after a stronger than expected earnings report but is still way off its February high:
Roku Inc is part of Cathie Wood's Ark Innovation ETF (ARKK) which is really struggling lately after hitting a high in February:
While Cathie Wood loves the setup for her stocks after the sell-off and expects big returns from her strategies, the truth is hyper growth stocks are in trouble.
Tech stocks in general are struggling to gain footing here but a distinction needs to be made between old tech stalwarts and new hyper growth tech which is more vulnerable to downside risks:
And the weakness in tech will continue according to Martin Roberge of Canaccord Genuity who continues to recommend commodities over technology, writing this in his weekly wrap-up:
No doubt, some commodity stocks like Freeport-McMoRan (FCX) and Alcoa (AA) continue ripping higher as demand for metals outstrips supply:
Our focus this week is on the obscure relationship between commodities and technology stocks. Why should this matter to investors? Because commodities are a barometer of global economic activity, hence a key driver moving bond yields which, by ricochet, impact the valuation of technology stocks. This cycle, we believe that the transmission mechanism between commodities and bond yields has been impaired because of the Fed’s “average” inflation strategy, which pushes back its tightening cycle. As such, to the extent that this strategy and QEs have held bond yields lower than normal, technology stocks may have performed better than normal as well. But what if we bypass bond yields and heed the message of commodities? Well, the surge of the CRB index above its 200-wma lately spells trouble for the valuation of technology stocks. Indeed, as our Chart of the Week shows, when a similar surge occurred in Spring 2000, a lengthy period of multiple compression began. In light of the marked compression in the equity risk premium for technology stocks, we reiterate our call to scale out of growth and rotate into value for the next 3 to 6 months.
Even energy shares (XLE) are reaccelerating up and making a bid for a new high:
But it's financials (XLF) that have carried the stock market higher and as the recovery gains, they are going to lead the way higher:
Having said this, the entire market looks shaky and we can see a sell-off ahead which hits all stocks, so it's very hard to play momentum in any sector right now.
I highly suggest you read Francois Trahan's latest weekly comment on the top three risks that will curtail the S&P 500 gains this year here.
I'll just share the beginning with you:
But take the time to read his full weekly comment, it's excellent and he even ends off with a new Sell Model to identify potential torpedoes you need to beware of.
Alright, let me wrap it up with this week's S&P sector performance as well as the best performing large cap stocks (it was mostly energy and commodities):