Sellers on the News
This past Friday the Labor Department released the nonfarm payroll report for March. Over the course of that day, I received feedback questioning whether the report could be categorized as “good news.” For me, that is exactly what was detailed in Friday’s jobs report – good news. Let’s keep in mind that the objective over the past month, and in the coming weeks, is to determine “how deep are the potholes?” from this past winter’s weather. This report is consistent with other recently reported economic news, such as ISM manufacturing, to suggest those potholes can be quickly repaired and are not too deep.
First, let’s take a look at Friday’s nonfarm payroll report…
- All of the job gains in March came from the private sector
- March nonfarm payrolls +192,000
- March private payrolls +192,000
- Positive revisions were reported for February’s labor report
- February nonfarm payrolls were revised to +197,000 from +175,000
- February private payrolls were revised to +188,000 from +162,000
- The labor force participation rate rose to 63.2% from 63.0% as 476,000 Americans re-entered the work force. I have long suspected that eventually those frustrated by an absence of jobs over the past few years would return to the workforce as optimism about the economy rose.
- The labor force participation rate (Figure 1) was 62.8% in December; a possible positive trend is developing based on the 0.4% rise since December
- The employment-population ratio (Figure 2) rose to 58.9%, the highest level since August 2009
- Average weekly hours worked rose to 34.5 from 34.2 last month
- Average hourly earnings year on year fell from +2.2% to +2.1%
- Average hourly earnings month on month were flat after last month’s +0.4%
- Workers unable to find jobs in March due to weather were 148,000, slightly above the historical March average of 140,000
- Workers unable to find jobs in February due to weather were 601,000, well above the historical February average of 317,000
- Retail employment reversed two months of weather-related losses, rising +21,000
Figure 1: U.S Labor Force Participation Rate, March 2008 to March 2014
Figure 2: U.S Employment Population Ratio, March 2008 to March 2014
If the labor report can be viewed as such a positive, then why did the market reverse its early gains and the S&P 500® Index (SPX) close down 1.25%? Unfortunately, the economic news and price action is consistent with what I expect from April. It will be a “sell on good news” month, as the potential for a second quarter correction for the SPX rises. I expect Q2 to be challenging for the SPX to continue its appreciation path. Price and earnings will have a high probability to reset expectations at a lower level, setting up late Q3 as a period in which bullish forces can resume the uptrend.
Momentum equities, in particular, with very rich valuations and high growth expectations are being aggressively sold, counter to their position of being the equities of choice during 2012-13. That shall continue as the better economic news supports further tapering and an earlier interest rate hike. Both of those conditions will impede the appreciation path for momentum equities with rich valuations and very high growth expectations. Expectations must reset lower, and investors should resist any charge to catch these falling knives.
The week ahead begins the upcoming SPX earnings season. Expect CEOs and CFOs to provide overall disappointing guidance, resetting expectations lower for the back end of 2014. Weather will absolute be utilized as an excuse, whether valid or not.
Eight SPX companies (Figure 3) will report, beginning with Alcoa (AA) on Tuesday. More importantly, on Friday investors will hear from JP Morgan Chase (JPM) and Wells Fargo (WFC).
Lastly, let’s keep our eyes on what develops in Japan with the looming consumption tax rise and Bank of Japan response. The highly levered Japanese yen (Figure 4) will be an incredibly important indicator for investors to watch over the next few weeks.
Figure 3: SPX Earnings Calendar, Week of April 7 to April 11
Figure 4 Japanese Yen, September 2012 to Present