Investors are second-guessing themselves today after Friday’s surge took major indexes close to their record highs. The push higher last week came on the heels of the monthly jobs report, so let’s take quick look at what got everyone so excited.
This visual from MarketWatch tells us just about everything we need to know regarding the latest labor market report.
To begin, the economy created 223,000 jobs last month and the unemployment rate slid to 5.4%. Remember to always take these figures with a grain of salt because they are “seasonally adjusted,” which means that the Bureau of Labor Statistics tweaks the figures to fit their seasonal models, which doesn’t always work out well (last month’s initial figure of 126,000 jobs created was revised to 85,000). Nonetheless, the headline figure was fine, and the underlying data was supportive of ongoing trends.
A look at job creation by industry (right side of the chart above) shows almost exactly what one would expect based on recent developments, namely continued growth across most sectors with the exception of mining and manufacturing.
We know mining has been a source of great distress as oil prices collapsed and employers cut back to manage costs. We also understand that a stronger dollar has shifted manufacturing demand away from US companies and towards countries with cheaper currencies.
Every bit of economic information that filters in these days is viewed from two main perspectives. The first is what it implies about the health and longevity of our economy. The second is what it implies about the Fed’s propensity to raise rates. I hate to even use the term, but this report has been dubbed another goldilocks report because it was strong enough to demonstrate underlying economic strength, but not too strong as to suggest an advancement of the Fed’s rate-hike timetable. That’s why the market responded so positively in its initial, yet frequently incorrect, short-term assessment.
Further encouraging signs included more people entering the workforce and hourly wages creeping up a modest 0.1% in April. Over the last 12 months wages have risen 2.2%, barely outpacing core inflation and suggesting that some labor market slack remains.
The number of part time jobs vs. full time jobs remains an outstanding issue, driven heavily by regulation. The U6 unemployment rate, which takes into account all Americans who want, but cannot secure, full time employment, ticked down marginally from 10.9% to 10.8%
[Read: May Macro Update: Employment + Wages = A Macro Growth Tailwind]
More information on labor conditions will be available tomorrow when the Labor Department publishes the Job Openings and Labor Turnover Survey (JOLTS report). Job openings currently sit at a 14-year high, but this may not mean all that much, considering many companies are commenting about a skills gap and an inability to find qualified candidates.
Moving on, additional optimism in the markets has come as companies beat their previously lowered earnings (yes, I realize how ridiculous this is). S&P 500 earnings were expected to fall 4.6% but are on track for a 0.4% increase, based on 455 companies having reported.
China is also helping to boost global morale as the central bank cut interest rates for the third time in six months. These rate cuts come on top of two reductions to banks’ reserve requirement ratios. The slowing growth in China is prompting an easing of monetary conditions, which in true Pavlovian form has investors foaming at the mouth. China shares rallied 3% today, following their worst weekly decline in five years last week.
Switching gears to the technical side of things, major averages (save the Transports) continue to trade near the upper ends of their respective ranges, but cannot seem to break out.
The S&P 500 is encountering tough resistance near 2120 and appears to be trading inside an ever-tightening range. This type of behavior is consistent with long, drawn out market tops, but is also consistent with consolidation before a subsequent advance.
No one knows with any certainty which path lies ahead, but at this time I’m inclined to place a higher probability on the markets continuing their advance. We know that rising prices beget higher prices, and some of the headwinds that have been prevalent (skyrocketing dollar, volatile energy prices) appear to be subsiding. In addition, none of our recession indicators are flashing red, even though first quarter GDP growth is likely to be revised to negative.
I was a guest on the Rich Dad Radio Show today and one of the topics that came up was how to position yourself, considering that the equity markets could continue rising for years to come, or could begin a substantial decline at any point. If you’re fully invested in the markets and they tank, it’s going to hurt, but if you’re on the sidelines and they continue to rise, that may hurt just as much.
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This is not groundbreaking advice, but in my opinion the answer comes down to utilizing forward looking indicators (such as price momentum and recession signals), and managing risk. The managing risk component can be distilled into one simple realization: as markets continue higher and become more expensive, the upside potential declines while downside risk builds.
You should be much more willing to be fully invested near the bottom of a bear market than near the top of a bull market. Managing your exposure in terms of perceived market risk may sound like a no-brainer, but it can be tricky to implement. It’s really the idea of not being greedy. When the market hands you nice gains (this one has tripled from its lows), a portion of those gains can be locked in, while others should be allowed to ride. Successful investing should be viewed as a series of small ongoing adjustments rather than trying to jump in or out at market inflection points. It’s about increasing and decreasing exposure in dynamic fashion. As the old Wall Street saying goes, bulls make money, bears make money, pigs get slaughtered.
The preceding content was an excerpt from Richard Russell's Dow Theory Letters. To receive their daily updates and research, click here to subscribe.
