Slow Job Growth In May Overshadows Otherwise Hopeful Outlook

Friday's May jobs report was no bed of roses, but then again it wasn’t as bad as it might have seemed at first glance or as some might be thinking. The markets didn’t react negatively in futures trading, and odds of a Fed rate hike didn’t show any impact and probably won’t.

May jobs growth was just 138,000, well below what many analysts had expected. The mediocre jobs number wasn’t the only sluggish aspect of the report. The Labor Department also revised jobs growth data from the previous two months downward, meaning jobs grew 66,000 less than previously thought in March and April.

Once you get past the headline number, however, there’s some decent news tucked inside. Construction jobs grew 11,000, and business and professional services added 38,000 jobs. Food and leisure also grew, which isn’t surprising considering the seasonal aspects of those industries. Health care was also a strong suit. Retail fell, but that’s not too surprising as the economy shifts from brick-and-mortar stores to online retailing. Also, unemployment fell to the lowest rate since 2001 at 4.3%.

Some things to keep in mind: This is the second May in a row to show disappointing overall jobs growth, so perhaps a seasonal factor is at work. Also, we’re still seeing leadership in sectors where we like to see it, including business-to-business services and health care. The so-called U6 unemployment rate, a broader measure of unemployment, fell to the lowest level in 10 years.

The take-way is that this likely changes nothing as far as the Fed meeting is concerned. Chances of a rate hike actually climbed slightly after the report, to 93%, according to Fed funds futures, before falling to 88%.

Before the jobs report, there was no sign of any June swoon on the first day of the new month, as the three major stock indices all posted record closes. Even the embattled Russell 2000 (RUT) index of smaller stocks rose nearly 2%. The Dow Jones Transportation Average, another indicator that had been sputtering, climbed more than 1%. Transports and small stocks are sometimes seen as leading indicators when U.S. economic activity picks up, Briefing.com noted.

Financials, which had been playing defense recently, climbed more than 1% Thursday to lead all sectors, but health care was close behind. Materials and consumer discretionary also made significant gains.

The path of least resistance still appears to be upward for the major indices amid general optimism about the economy. While rate hikes could potentially drag stock prices, they also often signal that the Fed feels confident about economic growth. Speaking of growth, Lululemon Athletica Inc. LULU reported strong quarterly results late Thursday, beating revenue and earnings expectations. Investors apparently liked what they saw, sending shares up 15% in pre-market futures trading.

VIX, the market’s most closely watched fear index, was back below 10 early Friday, near historic lows.

FIGURE 1: SMALL-CAP SURGE. While the Dow Jones Industrial Average’s ($DJI) new high grabbed the headlines, the story of the day Thursday may have been the Russell 2000 (RUT), which finished the day up nearly 2%. Of note, the small-cap index rallied back above its 50-day moving average (blue line). Data source: FTSE Russell. Chart source: The  thinkorswim platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

High Five

The Nasdaq (COMP) set another new high Thursday, and it’s gotten there in part due to vigor from a few big tech stocks. The 1960s brought us the so-called “Nifty 50,” but the list of highly influential names, at least in the Nasdaq, is a lot smaller today, with five major ones accounting for a decent percentage of the indice’s gains so far this year. Briefing.com refers to them as the “High Five,” and calculates their combined value at nearly $3 trillion. Amazon.com, Inc. AMZN, Alphabet Inc GOOG GOOGL, Microsoft Corporation MSFT, Apple Inc. AAPL, and Facebook Inc FB are up an average of 27% so far this year vs. about a 16% gain for the Nasdaq. If these companies comprised their own sector, Briefing.com said, it would be the largest sector in the S&P 500.

Oil Weakness Persists

Crude oil kept sinking early Friday despite a bullish weekly U.S. stockpiles report that showed U.S. crude inventories dropping by 6.4 million barrels, greater than a forecast 4.4 million-barrel decline. Over-supply worries persist, thanks in part to surging production in both the U.S. and Libya. The big oil draw does seem to indicate strong U.S. demand for energy, often a sign of economic vigor. Weekly rig count data are due later today.

Beyond the Construction Headline

April construction spending, a key nugget of data released Thursday, fell 1.4%. That was way off Wall Street analysts’ consensus for a 0.5% gain. Looking beyond the headline, however, the news didn’t seem so bad, mainly because the government revised the March construction spending figure to a gain of 1.1% from what had been a loss of 0.2%. So arguably it all comes out in the wash. Still, April was the first month with a decline since December, and this could play into Q2 Gross Domestic Product (GDP).