All evidence pointing towards an improving economy should be good news for stocks. But, as we saw with the market’s reaction on Tuesday to the minutes of the Fed’s last meeting, favorable movement on the economy’s front also means less support from the Fed going forward.
This morning’s strong labor market reading from payroll processor Automatic Data Processing (ADP) further confirms the economy’s strengthening fundamentals. Whether investors perceive this as good news or bad will depend on whether they think stocks need a healthier economy that can stand on its own or permanent crutches from the Central Bank.
I strongly believe that the prospect of no more Fed support is a net bullish development for the market and the economy, but this thinking will likely take some time to fully seep in. We also have fresh jitters about Europe this morning following a weak Spanish government bond auction, but the overall driver of today’s market action will be a reflection of the theme outlined above.
A total of 209K private sector jobs were in created in March, according to ADP, matching expectations. The jobs numbers for February and January were revised upwards to 230K (from 216K) and 182K (from 173K). The gains were broad-based across industries and business sizes, with manufacturing adding 23K and the broader goods producing sector generating 45K jobs.
As would be expected at this stage of the cycle, the services sector added most of the jobs, with small businesses accounting for the bulk of the hiring. Interestingly, weather did not appear to have been much of a factor as a number of analysts had been expecting, confirming that the labor market gains of the last few months reflect underlying improvement in the economy and not some temporary helping hand from Mother Nature.
The ADP tally sets the tone for Friday’s jobs report from the government’s Bureau of Labor Statistics (:BLS), which is expected to show headline job gains of around 200K. The ADP numbers have come below the corresponding BLS numbers over the last three months. February’s 230K tally of jobs (revised upwards today from 216K) was preceded by 182K (originally reported at 173K) in January and 267K in December.
The corresponding BLS tally of private sector jobs were 233K in February and 285K in January and 234K in December. Going by this trend, we will not only get an above 200K print from the BLS on Friday, but will most likely see positive revisions to the February and January numbers as well.
Please keep in mind that private payrolls in the BLS report have been revised upwards in each of the last nine months, likely highlighting that official BLS numbers are under-counting the full extent of labor market improvement. The unemployment rate will also likely come down from February’s 8.3% level to the bottom of the Fed’s 8.2% to 8.5% range for the year.
Tuesday’s Fed minutes showed that some on the FOMC are skeptical of the staying power of the labor market gains, citing the reversals in 2011 and 2010 of similar improving trends in those years. Even so, the majority on the interest-rate-setting panel appears comfortable enough with the economy’s growth momentum to not envision any further stimulus through additional quantitative easing.
This morning’s strong labor market reading further confirms that favorable view of the economy, likely disappointing those once again who were looking for the Fed to continue its easy-money policy. As I said at the top, this is no reason to feel glum. This development confirms that the stock market gains of the last few months are not only sustainable, but have solid fundamental support.
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