One of my long-held beliefs is that it really doesn't matter what the news is, only how the markets react. In almost 27 years of trading, investing and watching, I have seen it too many times when the news is so powerful in one direction, yet the market reaction is the exact opposite. Hence, the terms "buy the rumor, sell the news" or "sell the rumor, buy the news".
And sometimes, the news is as expected, yet markets see a more violent reaction. That was the case on last Friday with the April employment report.
Since the economic recovery began in 2009, my thesis has been that the U.S. will have a typical post-financial crisis recovery, seen many times after the Great Depression Part I. Economic growth teases and tantalizes on the upside, yet ever fully reaches escape velocity where GDP feeds on itself. Historically, it takes two full recessions to return the economy to its previous "normal" state. After six years, that's where our economy remains.
After another brutal winter in the eastern half of the country, first quarter GDP growth was borderline recessionary, just like in 2011. We saw the "seasonally adjusted GDP" show some odd negative seasonal tendencies in the first quarter that are not being adequately adjusted since the recovery began. Since I remain sanguine on the economy and bullish on the stock market, that leads me to believe that our economy will bounce back strongly in Q2 and Q3, just as it's done over the past few years.
WAGE INFLATION UNDER WRAPS
Getting back to Friday's jobs report, nonfarm payrolls grew by 223,000, meeting expectations, while the unemployment rate came in at 5.4%, the lowest since May 2008. The U6 unemployment rate, which measures the unemployed and underemployed declined to 10.4% from 11% in March. Keenly watched hourly earnings only increased by 0.1%, keeping any wage inflation concerns solidly under wraps.
The best description I can give of this report is Goldilocks, not too hot and not too cold although some in the perma-bear (continually wrong) camp are hanging their hats on the older ages of those filling new jobs rather than how well dispersed the new jobs were across sectors. Stocks soared and bonds bounced back.
Anyone left hanging on to a June interest rate hike by the Fed has to be convinced that it has barely a puncher's chance of occurring and that while September may be on the table, it's looking less than 50-50. The jobs market is solid and stable but far from overheating. I think the Fed needs to see a very good Q2 GDP coupled with at least two or three straight employment reports showing a minimum of 250,000 new jobs created.
(More: Advisers, investors reopen rate hike debate, send stocks higher after so-so jobs report)
The question now for portfolio managers like myself is, "does one good employment report turn the tide?"
Since I already mentioned that I all but dismissed the poor Q1 GDP number and I am not giving much weight to the weak March employment, I do believe that Friday's report is the start of the next upward swing in our frustrating but positive post-financial crisis recovery. With that, the intermediate-term outlook for stocks has brightened for many although unchanged from my already bullish vantage point. The three- or six-month trading range in the S&P 500, depending how you view it, should be resolved to the upside, whether this quarter or next. Sometimes, in order to end a trading range, markets move violently from one side to the other, often breaching key levels and forcing traders to take action, only to reverse course immediately in a sustained move in the other direction.
FALLEN ANGELS RISE TO LEAD RALLY
Regardless of how the current trading range resolves itself, I anticipate sector leadership coming from some familiar names as well as two fallen angels. Semiconductors, long a canary in the coal mine for the tech sector, are poised to resume their rally. Consumer discretionary, left for dead countless times during the bull's six-plus year reign, continues to confound the bears and lead.
(More: No champagne for new Nasdaq record)
One of my top sector picks for 2015, home builders, are getting ready for another run higher, even in the face of potentially higher rates. On the surprise side, the transports, leaders from previous years appear to be ending their six month plus period of digestion and poised for another assault on all-time highs. Finally, the banks and diversified financials, with several nails in their coffin, are at last finding fertile ground for leadership status after five years of being pulled along. This fallen angel could really shock and surprise the masses and give this old and wrinkly bull market new life later this year as net interest margins significantly increase.
Not surprisingly, defensive sectors like
REITs, consumer staples and utilities (another sector pick for 2015) should continue to struggle and potentially be dragged up by the market, best case, rather than lead it higher.
In the very short term, I do have some concern from the usual post-employment day hangover effect on stocks. Data miners can provide a stream of historical examples, but in plain English, when the stock market opens much higher and closes well, with volatility falling sharply, 75% of the time, the next few days are challenging and down.
Overall, Friday's employment report, while just meeting expectations, essentially threaded the needle and reaffirms my view that the economy remains in a typical, uneven, post-financial-crisis recovery. The aging bull market is far from over.
Paul Schatz is president of Heritage Capital.
