The US labor market continued to flex its muscle, sending stocks higher to end the week. Payrolls increased by 263,000, easily beating the expected gain of 180,000 for the month. As the economy continued adding new jobs, the unemployment rate fell to 3.6% – the lowest level since reaching 3.5% in 1969. As the labor market continues to tighten, many economists expect this to result in higher wages as jobs are becoming increasingly difficult to fill.
The strong jobs report helped offset losses earlier in the week following the Fed rate announcement. On Wednesday, the Federal Open Market Committee left rates unchanged. While this was the expected outcome, stocks headed lower following the decision as Fed Chairman Jerome Powell dashed investor hopes of a potential future rate cut. Despite a strong economy, President Trump suggested the Fed lower rates to further boost activity. The committee cited a lack of inflation as a primary reason to remain patient with future rate decisions, noting they don’t see a strong case for moving it in either direction any time soon.
With another positive week in the books, the S&P 500 has now rallied 25.29% since December 24 (just 89 trading days). While stocks have rallied significantly in recent months, it is important not to chase returns just because markets have been “hot.” There are still many reasons to remain cautious including slowing global growth, ongoing trade uncertainties, and a tight yield curve. It is reasonable to expect volatility to increase from current low levels as markets remain sensitive to major headlines. Daily market noise can make it tempting to make knee-jerk decisions, but as investors we need to stay committed to our long-term financial goals and risk tolerance. Staying focused on our long-term investment objectives and maintaining a disciplined investment strategy can help reduce market noise and increase the odds of a successful outcome over time.
Chart of the Week
The US labor market continued to impress in April as the latest report showed an addition of 263,000 jobs, extending the streak to 103 consecutive months of gains. With a growing labor market, the unemployment rate has steadily declined in recent years. This consistently positive data continues to reaffirm investor confidence in the economy as we near the longest economic expansion without a recession in US history.
*Chart source: Bloomberg
Broad equity markets finished the week mixed as small-cap stocks outperformed large-cap stocks. S&P 500 sectors were also mixed, with no clear differentiation between cyclical sectors and defensive sectors.
So far in 2019, technology and consumer discretionary are the strongest performers while healthcare has been the worst performing sector.
Commodities were negative as oil prices decreased by 2.15% to $61.94/bl. This is the second consecutive weekly decrease since President Trump announced Iranian sanction waivers will not be renewed. During the week, prices exhibited higher than usual volatility as US stockpiles came in at record highs. This would ultimately increase supply levels in the markets and help cap upward price pressure. Additionally, the four-week average of gasoline product supplied (a common gauge for US consumer demand for oil) rose for the eighth straight week. This reaffirms current beliefs that the economy is strong and able to handle higher prices.
Gold prices decreased by 0.35%, closing the week at $1,280.30/oz. Gold has experienced slightly higher than usual volatility over the last few weeks as investors remain conflicted about the future of the metal. Currently, it appears central banks around the world are buying gold at record levels as they look to move away from US dollar dependence. Since gold is a US dollar-denominated asset class, it tends to perform best when interest rates are low, volatility is high, and supply and demand forces are stable.
The 10-year Treasury yield increased from 2.51% to 2.54%, resulting in negative performance for traditional US bond asset classes. During the week, comments from Fed President Jerome Powell pushed yields higher. By week-end, strong economic data from the US drove investors into riskier assets further pushing up longer-term yields.
High-yield bonds were slightly negative for the week as riskier asset classes were mixed and credit spreads loosened. However, as long as US economic fundamentals remain healthy, higher-yielding bonds have the potential to experience further gains in the long-run as the risk of default is still moderately low.
Asset class indices are positive so far in 2019, with small-cap US stocks leading the way and traditional US bonds lagging behind.
Lesson to be Learned
Many people watch the prices of stocks they have recently sold more closely than the prices of those they still own; thus they show themselves to be more concerned with justifying past actions than in planning future ones”
– John Brooks
Hindsight bias leads us to believe an event was more predictable than it actually was. Unfortunately, this is an easy trap for many investors to fall into, reliving how they would have “acted differently” now knowing the circumstances of today. We need to be careful when evaluating how past events actually impact current market conditions. The past cannot be changed, but we still have the ability to adhere to a smart investment strategy and make our portfolio better in the future. Removing emotions from the investment process can help us avoid biases like hindsight, keeping us focused on what really matters – our plan moving forward.
FormulaFolios has two simple indicators we share that help you see how the economy is doing (we call this the Recession Probability Index, or RPI), as well as if the US Stock Market is strong (bull) or weak (bear).
In a nutshell, we want the RPI to be low on the scale of 1 to 100. For the US Equity Bull/Bear indicator, we want it to read least 66.67% bullish. When those two things occur, our research shows market performance is strongest and least volatile.
The Recession Probability Index (RPI) has a current reading of 29.29, forecasting further economic growth and not warning of a recession at this time. The Bull/Bear indicator is currently 66.67% bullish – 33.33% bearish, meaning the indicator shows there is a slightly higher than average likelihood of stock market increases in the near term (within the next 18 months).
The Week Ahead
Earnings season will begin to wind-down as fewer companies will report results. Investors will also be watching for consumer inflation data on Friday.
More to come soon. Stay tuned.
Derek Prusa, CFA, CFP®
Senior Market Analyst