(Friday Market Close) It’s hard to see how the script could have been any better for a Friday party on Wall Street. And the celebration went off just as you might expect.
February’s employment report earlier today was great across the board, delivering a massive 313,000 gain in jobs but accompanied by only mild wage growth. That could be called a “Goldilocks” scenario, because the economy churned out tons of high-quality jobs without a corresponding upward jolt to wages that might have renewed inflation fears. The core jobs growth was in areas investors typically like to see, including construction, manufacturing, and business and professional services. Those are sectors where workers can often build solid careers.
In another positive development, the employment report included an uptick in the labor participation rate, to 63% —from 62.7% last month — continuing an uptrend after a generational low of 62.3% set back in September 2015.
All these ingredients blended into a winning recipe that helped the Nasdaq (COMP) set a new record high for the first time since Jan. 26, back before that 10% market correction a month ago. Though COMP was alone in hitting a new record, all the major indices rose sharply, with the S&P 500 (SPX) cutting through technical resistance near 2,765 like a knife through butter and the $DJI easily closing above the psychological 25,000 mark.
Ten of the 11 S&P 500 sectors posted gains Friday, and financials hit an absolute home run with a rise of nearly 2.5% as the bond market weakened. Telecom and utilities were the only sectors that struggled, possibly because yields moved higher in the interest rate complex. The 10-year yield is back up to around 2.9%, still below recent highs but about 50 basis points above where it was when the year began.
That new high in the COMP wasn’t tentative by any means, topping the old mark by more than 50 points. However, even with Friday’s gains, both the Dow Jones Industrial Average ($DJI) and the SPX remain below their old highs of late January. The COMP is solidly ahead of both the $DJI and SPX year-to-date, and that’s partially a reflection of strength in the technology sector. Info tech easily leads all sectors so far in 2018, bringing back memories of last year. In addition, biotech, another key component of the COMP, has done quite well over the last month or so.
For the year, COMP is up nearly 8%, while the SPX has risen 3.37% and the $DJI has climbed just over 2%.
Looking ahead, the coming week brings a slew of data, but arguably none as important as the consumer price index (CPI) and producer price index (PPI) for February. These two numbers are due Tuesday and Wednesday morning before the bell, respectively.
The payrolls report Friday might have eased some inflation concerns, showing tepid 0.1% February wage growth and year-over-year wages rising 2.6%, down from 2.9% the prior month. However, that doesn’t mean we’re out of the woods, necessarily. No single data point tells the entire story, and that’s why CPI and PPI are important to watch. In January, CPI rose a moderate 0.5%, but much of that was driven by surging energy costs. With energy and food stripped out, core CPI was up 0.3%, arguably a more manageable number.
From a year-over-year perspective, CPI rose 2.1% in January, down from 2.2% the prior month and near the Fed’s 2% target, though the Fed’s preferred inflation market is personal consumption expenditure (PCE) prices, which have been consistently trending below 2%. Looking more in depth at January CPI, apparel, transportation, and medical care costs were some of the bigger gainers, so it could be interesting to see if those higher costs persisted into February. Additionally, watch to see if core CPI can break out of a pattern in which it’s grown either 1.7% or 1.8% year-over-year for the last eight months.
Another thing to consider going into the new week is that it really marks the start of a countdown to the next Fed meeting, scheduled for March 20-21. Nothing is ever a slam dunk when you’re talking about the markets or the economy, but when futures project an 88% chance of a rate hike and the Fed meeting is this close, that’s often something you can pretty much take to the bank. The Fed goes into its quiet period ahead of the meeting, but on Friday morning, Chicago Fed President Charles Evans told CNBC, “I think we really have the ability to be cautious” on plans for coming rate increases.
Chances of a fourth rate hike this year — a possibility that helped spook the market into a brief correction a month ago — have been creeping a little higher. They’re now around 33%, according to Fed funds futures, compared with 25% not so long ago. One thing to consider, however, is that generally wage growth has been pretty moderate despite the huge job gains over the last three months. Some analysts say this might imply additional “slack” that could allow the Fed to refrain from tightening the vise too much, and that might be what Evans was hinting at on CNBC. The Fed is under pressure not to hike rates to a level where they might choke off economic growth, even as it also keeps an eagle eye on inflation.
Another thing people might want to consider keeping an eye on this coming week is the political scene. President Trump was in the headlines Friday after announcing he would meet at some point with North Korea’s leader. Last year, verbal skirmishes between the U.S. and North Korea helped contribute to anxiety in world markets, but hopes for some sort of detente might be playing a small role in the market’s current rally. Any more news on that front — positive or negative — could affect the general mood. Also, Tuesday brings a special congressional election in Pennsylvania that political pundits say could point toward how things might go in November’s mid-terms.
Nasdaq is setting new record highs again, and volatility has eased a bit. VIX dropped below 15 on Friday. The employment report is in the rear view, and earnings are basically over. Unfortunately, this isn’t a time to relax. Investors might want to consider being careful next week, because there could be a lot of intra-day volatility. Worries about rates can flare up, especially when there isn’t much other news, and action could move back and forth quickly, with little conviction from a sector standpoint.
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