Volcano: A Mountain with Hiccups

By David B. Armstrong, CFA | May 06, 2013 | Weekly Market Commentary

I recently went exploring in Hawai’i Volcanoes National Park and came across a part of the lava flow that covered a road along the coast.  I thought this picture I snapped of a surviving road sign was a good lead in to my comments about what happens when everyone expects the worst.

See, no one seemed optimistic leading up to Friday’s payroll report, but once it came out and surprised everyone to the upside, it created a wave of buying that pushed the Standard and Poor’s 500 Index (S&P 500) and the Dow Jones Industrials to new highs.  The S&P 500 Index set a new milestone, surpassing 1,600 for the first time and ending the week at 1,614.42. The Dow couldn’t quite hold on to 15,000 but finished at a record of 14,973.96.

Here’s a recap of how the market did last week.

Taking a look back to the beginning of April, the government reported that nonfarm payrolls grew by just 88,000 in March.  This was horrible, as I discussed in previous blogs.  The 88k print ended up being less than HALF of what economists had been expecting. Since then, while there have been a few (very few) bright spots, most of the economic data we’ve been seeing in recent weeks has been…well…soft.  This includes data on everything from retail sales to durable goods orders.

So as a result, no one on Wall Street was expecting anything other than a lackluster number on Friday.

But WHOA!!!! Nonfarm payrolls increased by 165,000 in April.  This was WELL above the Bloomberg forecast of 153,000. While that does not seem to be a huge blowout, the fact was that there were a number of analysts (many of whom were on CNBC blabbering on and on) who were expecting a much weaker report. The cherry on top of the report was the significant upward revisions to the numbers released in February and March.

Oh, and remember that pathetic March reading of 88k?  Well that was revised up to 138,000! Couple that with that fact that February’s solid 268,000 reading was revised up to a very nice 332,000 increase!

Alongside the increase in nonfarm payrolls, the unemployment rate continued its descent, falling 0.1% in April to 7.5%. Unlike other recent decreases in the jobless rate which occurred as people left the workforce, April’s decline was due to stronger employment registered in the separate household survey report (nonfarm payrolls are taken from a different report). That means that the unemployment rate declined to 7.5% while the labor force remained unchanged, which is a nice change of pace.

But let’s keep this in perspective, since I’m sure we will hear about these great numbers in some soon-to-be-upcoming political press event. The average employment gains over the last eight months have averaged a somewhat respectable 193,000, but that has just been barely pecking away at the unemployment problem.

I read a funny cartoon over the previous week that showed a politician conducting a press conference and it went something like this, “Every single person, except Bob here who just got job, has dropped out of the labor force and has quit looking for a job.  As such, I am proud to announce that the unemployment rate is ZERO.” See, the headline-grabbing jobless rate of 7.5% doesn’t include those who have given up looking for work, nor does it include part-timers who want full-time work.

Nonetheless, the real news of Friday’s announcement is the sigh of relief that job growth, and by proxy economic growth, doesn’t appear to be slowing too quickly. And that’s what got the rally going on Friday.

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⁽¹⁾      West Texas Intermediate crude spot price is as of end of week.

⁽²⁾      London Bullion Market Association; gold fixing pricing at 3 p.m. London time.