What’s going on here, as yesterday the market did the exact reverse of what it had done the day before on the little mini-panic over what turned out to be a completely erroneous jobs estimate by ADP, and what else is new in that regard? In other words, are the people who decided to get negative because of their completely inaccurate estimate for 119,000 jobs, which was only off by 57,000 and sold out on that day as a result, going to ask for their money back? My estimate was for around 150,000 and even though that was still a little lower than what the official number turned out to be, at least it was closer than theirs, but no one asked me in the first place.
So instead of continuing Wednesday’s decline, things made an immediate upside turnaround as the Dow opened with a 40 point gain right off of the opening bell and never looked back, as around an hour or so into the trading session, it made a fast move up to the 130 point or so level and that was it as it closed with a gain at that level. Breadth numbers were at a 3/1 positive ratio, which was strong indeed and once again the VIX declined by less than it should have relative to a Dow gain of this sort, losing .90 to 13.59. And after the new upside explosion today, this once again proves that those who have been keeping the VIX higher than it should be because of the weak seasonal tendency of the market at this time of the year are sort of barking up the wrong tree so far, as both the Dow and S&P are at new all-time record highs once again.
And for a change it was the cyclical stocks that led the way higher, in addition to the material and energy stocks, which are the ones that got sold off the most on Wednesday because of the ostensible anxieties about a “slowing economy” based on what turned out to be the incorrect ADP estimate and the weaker ISM Manufacturing Survey in addition to March construction spending being negative when a positive number was projected.
And even the technology stocks that have been struggling lately did well, and perhaps we are seeing a return to favor with this group, as AAPL continued its rebound from the 45% decline level it had undergone lately, GOOG kept powering ahead, AMZN battled its way back from a poor reaction to its earnings report last week, and old-time ORCL gained ground for whatever reason.
Ahead of today’s jobs report, the yield on 10-year Treasury notes remained at its low level for the year, at 1.63%, and pity on those who felt the need to buy it here after today’s bullish jobs report. And how about crude oil, which could not stand to be lower ahead of the rapidly approaching summer driving season and made a huge move higher of $3 a barrel up to $94 despite those 82-year highs in inventories, go figure. And finally the Euro, which got sold off on the E.C.B. doing what most observers thought it was going to do, as it joined other central banks that have already lowered rates by decreasing their main financing rate to a record low 0.5% from 0.75% as they said that “Our monetary policy will remain accommodative for as long as needed.” In addition, they said that they were going to charge banks to hold excess reserves, which also contributed to the selling as it settled right back around a familiar area at 1.300.
All of these upside moves set the stage for today’s upside blockbuster, as the April jobs report rose by more than the experts, particularly those at ADP had expected, in addition to those sheepish analysts who dutifully followed the ADP numbers down by making their own lower numbers as well (145,000 down from 160,000). The April number was a good 165,000 and more importantly, that awful March number of only 88,000 was revised sharply higher to 138,000, which of course raises the question of why they do not release these numbers with a two-month lag in order not to force some investors to sell out like they did last month when that ostensibly awful figure was published. And to make matters even better, the February number was revised really sharply higher to show a 332,000 gain which was the largest since May 2010. This was a 64,000 higher revision. On the other hand, the gains were still below the 206,000 jobs that were created monthly in the first quarter on average, which still could be argued shows a slowing trend.
In addition, construction jobs fell for the first time since last May and manufacturing jobs were unchanged. Average hourly earnings rose a bit but the average workweek declined. On the more optimistic hand, the 0.1% decline in the jobless rate down to 7.5% was actually reflective of a gain in employment, rather than what happened last month when people left the workforce.
This jobs gain number is still below the 300,000 or so that is still needed to put a significant dent in the unemployment rate, which currently stands at that 7.5%. The data probably also means that the Fed is certainly not going to “adjust” its bond buying program higher, although the data was not strong enough to make them adjust it lower either for the time being as well.
Retail jobs led the increase at a 29,300 gain and temporary help, which is often a sign of future hiring, increased by the most since February.
Overlooked in all of this were two other reports that were not so great, as March factory orders fell by 4%, but excluding transportation they actually rose by 2%. And the April ISM Non-Manufacturing Survey declined to its lowest level in nine months, and remember that this covers around 90% of the economy, even though it did show expansion.
As a result of this upside surprise, the major indexes came roaring out of the starting gate and have only come off modestly, as the Dow hit its high of the day at 10:40am with a 178 point advance and is currently ahead by around 150 as this is being written. Breadth numbers are at a better than 3 to1 positive ratio and the VIX is once again declining by less than it should be with a .72 fall to 12.87 as those die-hard bears keep buying VIX-related products in the hopes of the traditional seasonal correction.
And to no one’s surprise, the cyclical, energy, mining and resource stocks are doing the best on the better economic scenario, but this could change at the drop of a hat on the next series of weaker numbers.
Bond yields are rising by the most in seven months, with the 10-year up to 1.74%, once again perhaps confirming a bottom in the 1.63% or so area and naturally crude oil, which uses any excuse to go up ahead of the summer driving season, is gaining another $2 which puts it close to $96 a barrel, and here we go again. The Euro is rising a bit on the perception that the jobs report was not strong enough to change the Fed’s current QE easing policy.
The first-quarter earnings season keeps slogging along, with 404 S&P companies that have reported so far, 69% have beaten the estimates, which compares to the average from the last four quarters at 67% and the average from 1994 of 63%. Revenues have only beaten in 47% of the companies, and this compares to an average beat rate of 62% in the last year and 52% since 1994.
First quarter earnings rose by 6.2%, increased by 5% for the second-quarter, were flat for the third-quarter and were 6.3% higher in the fourth-quarter. The current projection is now for a gain of 3.6% in the first-quarter of 2013, down from the original projection of 4.3% in January but higher than the 1.5% estimate on April 1st.
The S&P trades at 14.2 times the projected 2013 earnings of $111. Earnings were $85 in 2010, $92 in 2011 and $102 in 2012. The estimate for 2013 is $111, a gain of 9%. The average P/E multiple for the S&P going back to 1954 has been 16.4 and it has been 14.4 for the last 10 year’s average.
After four consecutive quarters of negative G.D.P. growth, we have had 15 consecutive quarters of positive growth, starting with the third-quarter of 2009, every quarter in 2010, every quarter in 2011, and every quarter in 2012. G.D.P. rose by 2.2% in 2012, and is projected to increase by 2% in 2013, according to various surveys, with 2.5% in the first-quarter and then in the low 1’s for the second and third-quarters before a fourth-quarter acceleration to over 4%.
Donald M. Selkin
Don Selkin is the Chief Market Strategist at National Securities Corporation, member FINRA/SIPC, (NSC) and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analyses concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, Recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, Associated Press}.