It’s hardly great news, but the fact that job destruction was a bit less destructive last month will inspire the optimists that the recovery has begun.
Nonfarm payrolls shrunk by a relatively modest 20,000 last month, or roughly a quarter of the monthly losses that have been posted in each of the previous three months of this year. The April reprieve, if we can call it that, certainly made a graphical impression. As our chart below shows, last month’s softening in job losses ended a five-month stretch of decelerating conditions for minting new employment opportunities. By that we mean that for the first time since last October, the trend last month didn’t worsen compared to the previous month. And while we’re pointing out reasons to be cheerful, let’s note that the jobless rate ticked down to 5.0% in April, slightly better than the 5.1% for March.
But let’s not get carried away, at least not yet. Let’s not forget that goods-producing employment is still getting hammered even as the broader employment picture offers reason for hope. Meantime, Wall Street is eager to see light at the end of this tunnel, as yesterday’s stock market surge suggests. Yet another rate cut by the Fed earlier in the week helped get the bulls’ hearts racing, as did an improvement in the dollar in forex markets. And as we noted yesterday, April generally was a good month for most asset classes.
So, what’s the problem? As always, there’s no shortage of things to worry about. But no one should underestimate the stock market’s capacity for climbing this year’s wall of worry. Mr. Market is always looking forward while many of us are overly focused on the past. Such is the limitations of being stuck with wetware as the primary tool in the business of asset management.
In any case, the fact that the S&P 500 is still well below its all-time high of last October suggests a case for adding a bit of risk exposure to portfolios that have shed equity weighting in the correction of recent months. By that standard, it’s still possible to see yourself as a contrarian if you’re buying stocks today vs. last October.
In your editor’s humble and perhaps flawed opinion, however, it’s still not time to load up portfolios with a super size dosage of risk. For starters, the rebound of April may be noise. Consider the S&P 500, which suffered five straight months of total return losses through March. Such a string of red ink almost never happens in the broad stock market. The fact that equities posted an extraordinary line of consecutive losses suggested that April would surely witness some degree of gain.
Meanwhile, there’s the issue of interest rates. The Fed has slashed the price of money to 2.0% in Fed funds from 5.25% last September. Is this the end? The chatter suggests it is, barring some new calamity that’s currently off the radar screen. When and if the economy stabilizes, or starts to show the capacity for sustainable growth again, the central bank will have to start hiking rates, or so one would assume. Is the market factoring in that outlook?
Not yet. Rather, the crowd is looking at the short-term effects of stimulus. That includes the fact that the Treasury begins sending out the stimulus checks this month. The possibility of juicing consumer spending, and therefore the economy may be better than even for the next few quarters.
The question is whether all the stimulus will take root and right the ship to the extent that a new upcycle is set in motion? For what it’s worth, we’re betting on the idea that the recovery will take longer to bubble than the leading edge of optimists assume. Embedded in our expectation is the worry that the stimulus effect will fade by this year’s Q4 and digesting the excess will reveal itself anew in the economic stats. All of which adds up to the possibility of flat lining into early next year on a macroeconomic perspective. As to how the stock market prices that possibility is anyone’s guess. Traders may have the wind at their backs in such a scenario, but strategic-minded investors can still afford to be patient and selective.
Then again, that’s just a guess. No one knows what’s coming and so we’re all left to apply reason and logic in a space that’s notoriously immune to such efforts. So it goes.
Nonetheless, we’ll be looking closely at the data that rolls in for May for signs, anecdotal or otherwise, that April’s rebound was something more than just an uptick in a deeper downturn. Meantime, we’re still digesting April’s numbers.