Jobs Jump: Big April Gains Put March Memories Behind, Inject Optimism

There’s an old saying that people having jobs solves all ills. If that’s true, today’s jobs report could give the market some relief from recent concerns about soft economic numbers and provide the Fed more leeway to raise rates next month.

Jobs growth of 211,000 in April compared with a revised number of less than 80,000 in March, and made the March figure appear “transitory,” as the Fed might say. The unemployment rate edged lower to 4.4%, and wages rose 0.3%, as Wall Street analysts had expected. This report looks pretty good, with broad-based job gains and little sign of job losses in any industry. Job gains are averaging about 185,000 a month so far this year, despite the tepid March number.

Looking a little deeper into the data, there were big gains in leisure and hospitality, business services, health care, and financial activities employment. Mining jobs rose a bit, too. Other sectors were flat, but that’s not necessarily an issue because health care and business services were so strong. The sharp rise in leisure and hospitality employment may be seasonal ahead of summer, but those jobs are up 260,000 so far this year, so perhaps it’s a longer-term trend. It’s never a bad thing when more people are going out to eat or staying in hotels.

After this morning’s report — which outpaced Wall Street analysts’ consensus job growth estimates by about 30,000 — the probability for a rate hike at the June Fed meeting climbed above 80%, according to Fed funds futures. Today’s numbers certainly give the Fed one more great data point for raising rates. Several Fed speakers are scheduled today, so we’ll see if they have any comments on the jobs data. Fed Chair Janet Yellen has a speech scheduled this afternoon, but the topic is the history of women in the economy, so it’s unclear if she’ll discuss anything current.

The jobs report outweighs all the concerns about recent slow economic data. The jobs number is the report that’s most important, and this number today looks solid.

The jobs report didn’t seem to help crude oil, which fell more than 4% on Thursday to its lowest level since the OPEC production cutback in November, and continues to move lower early Friday. The question is whether this pullback reflects supply, demand, or both. As a supply story, low oil costs generally help companies’ bottom lines because energy is a cost that affects nearly every aspect of the economy. But if cheaper oil reflects falling demand, it could be a more worrisome development. Energy stocks tanked Thursday and energy remains the weakest-performing sector year to date (see below).

Stocks revived yesterday despite energy’s weakness. It was quite a comeback, in retrospect, as the Dow Jones Industrial Average ($DJI) finished just eight points lower after being down 100 points early in the day. This might speak to continued resilience in the market, as we mentioned earlier this week. Strong earnings continue to be the main story.

Caution could work its way back in later today, however, as traders might even some positions ahead of the French vote this weekend. In fact, stocks barely moved in pre-market trading after the strong jobs data, and worries about the election could be the reason. Keep a close eye on stock futures this Sunday to see if they show any kind of reaction to the election results, because that could provide clues about the market’s potential reaction Monday. Also keep an eye on currencies. The euro has been rallying amid hopes that the centrist candidate might win in France. Polls show him far ahead.

Data Dive

Factory orders and productivity data Thursday both played somewhat into the current economic slowdown theme, coming in below Wall Street analysts’ estimates. Productivity declined in part due to rising labor costs, the government said. And factory orders looked weak on the headline, but some good news lay within as durable goods orders rose 0.9% and business spending also climbed. Next week brings the monthly Job Openings and Labor Turnover survey (JOLTS) report as well as retail sales, so watch those for hints about a possible end to this “transitory” slowness in the economy, as the Fed has termed it.

Riding the Earnings Express

S&P 500 earnings growth in Q1 is now expected to be 14%, according to research firm CFRA. The firm projects 10 out of 11 sectors to see earnings gains year over year, up from the previous estimate of seven. Only telecom services will end up in the red, CFRA said. The rise in earnings estimates as the season progresses shouldn’t come as a surprise, because initial estimates have been surpassed now for 20 quarters in a row. That means people might look at CFRA’s 7.8% earnings growth projection for Q2 and think about whether and by how much that may be exceeded. We’ll find out this summer.

Sector Check

The info tech sector was pretty flat Thursday, but still easily leads all sectors in year-to-date growth with a better than 16% gain. Other leading sectors so far this year include consumer discretionary and health care, both of which have 10% year-to-date gains. Energy and telecom services bring up the rear, both posting double-digit losses since the start of January. There’s strength pretty much across the board other than those two sectors, with cyclicals like industrials and materials as well as non-cyclicals like utilities and healthcare posting moderate or better gains. Nine of the 11 sectors are higher on the year, and the S&P 500 (SPX) as a whole is up more than 6%. Last year, the SPX rose more than 12% when all was said and done. The difference is that last year’s gains were kind of back-loaded, coming in a big spurt after the November election. At this time a year ago, the market was just getting back to unchanged after being hammered in January and February.