Shortly after Friday’s strong report on employment conditions in April, the Dow and S&P 500 touched new highs, but they couldn’t hang on to them and the week ended with modest losses in the market averages. The S&P 500, in the first hour of trading hit an intraday high of 1891, topping its April 2 record close of 1890 only to slide to 1881 at today’s close, where it was down 0.1%. The Dow, following a similar pattern, ended Friday down 46 points at 16513 for a 0.3% decline, having failed to hold its 0.4% gain to a record 16620 at around 10:00 NYT.
The NASDAQ Composite fared somewhat better Friday, losing just 0.1%; it would probably have ended in the black except for its biotech component stocks, which declined 1.5% in a renewal of the weakness that has them down 16% since late February. Social media stocks and other high flyers had a volatile week, with some extreme moves in individual stocks: LinkedIn and Twitter lost more than 6% for the week, Twitter on disappointing growth in users; Netflix and Tesla were up more than 5%. All told, NASDAQ ended with a 1.2% rise for the week, trimming its year-to-date loss to 1.3%, where it continues to lag the Dow (-0.4% YTD) and S&P 500 (+1.8%). The two blue-chip market averages have fared better than NASDAQ in the profit taking rotation of recent weeks.
Friday’s modest declines in share prices were surprising in light of this morning’s even more surprising headline on the jobs front, where 288,000 net new jobs were added in the non-farm economy during April. That 288k total, which represents a 273k increase in private sector jobs and a 15k increase in government jobs, was the best monthly rise in two years. Indeed, April was the 3rd straight month in which U.S. employment increased by more than 200k. Lest one get carried away with today’s employment report – and investors certainly didn’t seem to – note that, on a smoothed, three-month basis, the 238k net job additions (225k private) in the latest three months is not materially different from the levels of job creation in early 2013 (roughly 230k). Also there in this morning’s report to temper investor enthusiasm, average hourly earnings were flat last month and are running just 1.9% above year-ago levels, slowest growth in more than a year.
For not the best of reasons, the civilian unemployment rate dropped from 6.7% in March to 6.3% in April, the lowest since 2008. In the separate household survey from which the unemployment data are drawn, April saw a 73k decline in employment – this is often a noisy data series – and a more than 700k decline in unemployed, as 806k people left the labor force. This exodus from the labor force, which has basically flat-lined over the past year, reflects the retirement of baby boomers but also the departure of discouraged workers. Said another way, labor participation fell back to a 36-year low of 62.8% last month, not exactly how one would prefer the unemployment rate to decline.
In the end, then, perhaps equity investors were right not to get overly excited by April’s employment gains and unemployment decline. The Dow Industrials and the S&P 500 Composite are after all down less than 1% from their highs. This after returns of 30%-35% over the past 18 months. If GDP growth rebounds from the dismal 0.1% first-quarter rate into the 4% range in the current quarter – as seems likely – and if growth thereafter levels out on a better trend line than the 2¼% growth rate averaged since the recession ended in 2009 – admittedly a bigger IF – then there is a good chance that stocks will behave better than the somewhat shaky performance seen so far this year.
If stocks were not particularly impressed by Friday’s jobs report for April, the bond market, curiously enough, was. Down when the jobs numbers were first released, prices of 10- and 30-year Treasury bonds finished the day up one-quarter of a point and nearly a full point, respectively. The yield on the 30-year T-bond fell to 3.37%, the lowest in going on 11 months; the 10-year yield hit 2.59%, lowest since February 3, which was incidentally the low water mark for stock prices this year. The bond market is not exactly “forecasting” economic trouble ahead, not with high yield bonds continue to register solid excess returns above Treasury bonds. Increasing violence in Ukraine may be playing some part in the strength in bonds, as well as in the wobbly showing by stocks.
Reports/dates/facts/links to watch for over the next week:
- May 5: ISM non-manufacturing survey for April.
- May 6: U.S. trade balance for March.
- May 7: U.S. productivity and unit labor costs for Q1 2014; MBA home purchase applications and mortgage refi’s (latest week); U.S. consumer credit for March.
- May 8: Same-store sales for U.S. chains (April); German industrial production (March).
- May 9: JOLTS job openings survey for March.
Copyright © 2014 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.