Portfolio Impact from 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 that’s convincingly 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 immediately reverse course in a sustained move in the other direction.
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.
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, the next few days to a week are often, 75% of the time, 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.
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