For several months the U.S. stock market has been impressively shrugging off a staggering string of terrible economic reports that seemed to indicate the economic recovery is stumbling again, as it has in each of the last three summers.
Since in each of those last three years the stumbling economy was accompanied by double-digit corrections by the S&P 500 of up to 21%, the market’s lack of concern this time has been puzzling analysts.
In my column last week I noted that although the market gets high marks for its resilience and ability to shrug off the negative economic reports, it had also made almost no further progress over the last six weeks. The Dow & S&P 500 had been trading in a narrow sideways range since mid-March, while the DJ Transportation Average and Russell 2000 had pulled back 4% or so from their levels of mid-March.
But it seemed quite likely that given this week would be one of the most intense weeks for important economic reports in some time, the market’s sideways action of the last six weeks would end in one direction or the other this week.
The question was “will the reports show sharp positive reversals indicating the slowdown in February and March reports were temporary glitches due to weather or some such? Or will they provide still more evidence that the economy is stumbling again this year?”
The week did not begin well for sure. The first three days of the week included reports that Consumer Spending was up only 0.2% in March, the smallest gain in six months. The Dallas Fed’s Mfg Index plunged from +7.4 in March to -15.6 in April. The Chicago PMI Index, often a harbinger for the national ISM Mfg Index, fell from 52.4 in March to 49.0 in April, its lowest level in more than 3 years. The ISM Mfg Index fell to 50.7 in April from 51.3 in March. The ADP Monthly Jobs Report showed only 119,000 jobs were created in the private sector in April, a substantial decline from the 158,000 reported for March.
And indeed the market did seem to begin paying attention, the Dow plunging 138 points on Wednesday. The Fed also seemed to take more notice of the sharply worsening conditions, assuring markets with its FOMC statement on Wednesday that the Fed remains flexible and stands ready to increase or reduce the pace of its QE stimulus to maintain policy accommodation.
But then a dramatic reversal in reports seemed to begin Thursday morning, with news that weekly unemployment claims fell 18,000 to 324,000, the lowest level since January, 2008. And it was reported that the U.S. Trade Deficit unexpectedly narrowed by 11%, in March. The significance is that a narrowing trade deficit is a positive for the economy as American companies earn more from overseas sales, while American consumers and businesses spend less on foreign products.
The relief provided by those two positive reports on Thursday was enough to close the Dow up 130 points for the day.
An even bigger impact was made Friday morning with the Labor Department’s monthly employment report for April. It showed 165,000 jobs were created in April, much better than the consensus forecast for 135,000. More impressive, the previous month’s shocking report that only 88,000 jobs were created in March was revised up to a tally of 138,000.
That was enough to have the Dow up 175 points by mid-day Friday.
It would have been more impressive if the positive reports had included more than just the jobs picture and the narrowing of the trade deficit.
But the other reports on Friday, ignored by the market in the excitement over the jobs report, were a continuation of the dismal reports of earlier in the week, which have been going on for two months now.
The Commerce Department reported that Factory Orders fell a substantial 4% in March, and the ISM Non-Mfg Index (services sector) declined from 54.4 in March to 53.1 in April, worse than the consensus forecast.
So unfortunately the question remains. Was there really enough in this week’s heavy schedule of critical reports to vindicate the market’s willingness to ignore the negatives?
The employment picture is very important. However, as I pointed out in the other direction, when jobs were still suffering even as signs were showing up of the Great Recession ending, jobs are a lagging indicator that would not improve until after the economy had improved sufficiently.
Unfortunately, they are also a lagging indicator in the opposite direction. Companies do not let workers go until they can’t handle the slowdown in sales by cutting back on workers’ hours. And that was the one glaring detail in the jobs report. The average work-week declined 0.2 hours to 34.4 hours. Just as increasing workers’ hours and adding overtime is an indication of a coming increase in hiring, so a declining work week may be a sign of peaking jobs creation.
Meanwhile, outside of the employment situation, the week’s critical economic reports across a broad array of conditions showed only further deterioration of the slowing trend.
