BLS Pleasantly Surprises, What's Next?
The unemployment rate ticked down to 7.5%, the lowest it's been since December 2008. This was made possible by 165,000 jobs created in April, according to the Labor Department. Estimates in the beginning of the week were for 155,000 jobs, but expectations came down throughout the week after the big disappointment in the ADP reading to 135k.
Perhaps the bigger news and the true motivator for both the markets and for confidence were the revisions, which added an additional 124,000 jobs in March and February than previously reported.
The number of new jobs created in March was revised up to 138,000 from 88,000 and February's figure was revised up to 332,000 from 268,000. With the new data, the number of jobs created in February was the highest since November 2005 for any month if you back out temporary Census bureau hiring.
One bit of data that I tend to focus in on in particular is the Labor Force Participation Rate, which remained steady over the last couple months. A dropping participation rate can skew the data and lower the unemployment rate artificially as workers are leaving the workforce. But the fact that it has remained relatively stable helps with assuring that jobs are actually being created and unemployment is on the decline.
Also in the data, we saw that the average workweek fell two ticks in April to 34.4 hours. Longer workweeks are usually a sign of a strong economy and it is important to note that workweek length remains near a pre-recession high. But are workweek lengths high because companies are trying to squeeze every last drop of productivity from workers? Or maybe workers themselves are working harder to keep their jobs?
As a realist, I can't help but speculate the positive and the negative. When I look back at the last 3 years, May has been the high point of the Jobs number and the stock market and I can’t help but look at those data and think that history could be repeating itself.
Over the last three years, you should know that overall manufacturing PMI has been decreasing on average and that services PMI tends to peak right around the same time as the employment numbers in May and then drop off.
There are a plethora of additional factors, including market valuation and earnings growth, that seem to be playing out just as they have at least in the past 2, if not 3 years that point to this being the top of the market and the employment strength for the year.
What Do You Think Happens to Employment and the Stock Market After May?
1. Employment peaks with the stock market and both begin to move lower.
2. Employment flat with the stock market flat
3. Employment flat and market continues higher
4. Employment continues to improve and markets move higher
5. Employment continues to improve, but markets selloff because the Fed is more likely to back away
6. Other
**Please briefly explain your thesis.
I believe this is the peak in employment growth for the year (at least until October). I believe that the coming months will be must less robust in terms of employment growth with several misses; this will drive most richly valued stocks lower (the broad market). It seems to me that too many data are pointing to slowdown and yet valuations are richer than they have been in the last three years. I this it will be increasingly difficult for traders to justify these levels, especially with negative revenue growth.
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