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Stocks Rally Despite Weak Jobs Report

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The S&P 500 gained 1.7% over the week to close at 2,102 – within striking distance of its March 2 high of 2,117. European blue chip stocks have been on a tear. The Euro Stoxx Index was up 2.7% in euros, although it was actually flat in dollars owing to a weakening euro on FX markets.

The monthly employment report out April 3 was weak. Job gains were only +126,000 in March vs. the +275,000 month average over the past 12 months. The U.S. unemployment rate held steady at 5.5%.

First quarter earnings season in the U.S. is upon us and most analysts believe it’s not going to be pretty. The consensus is looking for up to a 5% YoY decline in earnings for companies in the S&P 500, mainly driven by very weak results from the energy sector. With the Fed poised to raise rates, earnings are going to have to increase as we move through the year to justify current stock prices.

Investors are still skeptical of the stock market; YTD, U.S. investors have pulled $11B out of equity funds and put $48B into bond funds.

The 10 year Treasury gained almost a nickel in yield (bond prices fell slightly) to end the week at 1.95%. The German 10 year bund yields only 0.15%.

The FT reports that Switzerland has become the first government in history to sell benchmark 10-year debt at a negative interest rate, as falling prices (deflation) and unprecedented action by the world’s major central banks send global markets further into unknown terrain. Bonds with negative yields have become one of the world’s fastest growing asset classes, accounting for around a quarter of Europe’s government debt market.

Meanwhile, Mexico lined up a rare deal to borrow euros that it will repay 100 years from now.

ISI Strategies on the FOMC March minutes released Wednesday: “Participants highlighted further labor market improvement, stabilization in oil and a leveling out of the dollar as factors that would help boost confidence in the inflation outlook. The minutes repeat that the Committee could raise rates before it sees increases in core inflation or wage acceleration. We view this on net as very consistent with a September base case for lift-off.”

“While ‘several’ participants leaned in favor of a June hike, ‘others’ (we think this means a majority even before the latest employment report) favored later in the year in light of the drag on inflation from the dollar as well as oil and a ‘couple’ favored 2016.”

Low inflation everywhere, except in Russia! It reached 16.9% YoY last month, a 13-year high. The ruble has declined almost 40% against the U.S. dollar since last summer.

On Wednesday, Ed Yardeni noted: “oil gave back recent gains after Saudi Arabia reported a record production of 10.3 million barrels per day in March, a figure the country’s oil minister said was unlikely to fall by much. They are obviously aiming to keep oil prices down to hurt Iran, and Russia too. We also learned that U.S. crude oil inventories soared to a record-high 482.4 million barrels during the week of April 3, 2015, up 26% YoY.” Despite this, for the week, oil climbed a couple of bucks to $52.

WSJ: “Greece remains a source of great drama for investors in the eurozone, even if that drama rarely materializes as real-world action. Thursday, the country made a 460-million-euro payment to the IMF – a payment that its new leftist government had threatened not to make. This suggests the government, which in its ongoing battle with its European creditors tends to employ threats of destabilizing actions in a bid to secure debt relief, has few real cards to play. This was also seen Wednesday, when Prime Minister Alexis Tsipras, who is visiting Moscow, denounced the European Union’s sanctions against Russia.”

Still, Greece will exhaust its cash reserves by the end of this month if it fails to agree to a new reform package with the Eurozone.

A few of us attended Northrim Bank’s annual luncheon last week. Mark Edwards, the bank’s chief economist, presented an outlook for the Alaskan economy given the drop in oil. Mark always does a great job. You can find the presentation at Alaskanomics – a terrific resource for economic and budget issues facing Alaska.

Next week will be chock full of data from corporate earnings (including the major banks) to economic indicators including inflation (up a little), retail sales (strong), industrial production (weak), and leading indicators (solid).

Factoid: Yesterday, April 9, marks the 150th anniversary of Confederate General Robert E. Lee’s surrender to Union General Ulysses S. Grant at Appomattox, Va., effectively ending the American Civil War.

If you like local theater, check out “South Pacific” in Wasilla at the Valley Performing Arts Center. We went last Sunday and it was quite good. Fair warning; it’s almost 3 hours. It runs through April 19.

Jeff Pantages, CFA
Chief Investment Officer

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