Date: May 12, 2015

April Employment Report Turns the Tide

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 where 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 Friday with the April employment report.

Since the economic recovery began in 2009, my thesis has been that the U.S. will have your typical post financial crisis recovery, seen many times previous after the Great Depression part I, South America, Latin America and Japan. Growth teases and tantalizes on the upsides, 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 we saw in 2011. We have now seen the “seasonally adjusted GDP” show some odd negative seasonal tendencies in Q1 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.

Getting back to Friday’s jobs report, non-farm payrolls grew by 223,000, equaling 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 came down 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 is 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 print in a few months coupled with at least two or three straight employment reports showing a minimum of 250,000 new jobs created.

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Paul Schatz, President, Heritage Capital