(Friday Market Close) The market quickly retreated from its mid-week rally Friday as investors responded to new trade war rhetoric by scurrying for possible protection in the fixed income market. By the end of the day, all the major stock indices were down more than 2%, sinking back toward lows seen early in the week.
The market’s plunge Friday appeared to be a reaction to the blossoming trade battle with China, with the underwhelming March jobs report playing little if any role. However, it’s important to keep things in perspective. What we've seen with this administration is a trend of a big statement, followed by everyone getting riled up, and then a pragmatic solution being found. Cooler heads may prevail moving forward.
Warning signals really started flashing as volatility spiked sharply Friday and bonds quickly climbed, sending yields lower in the interest rate complex. Today was the first day in a while that seemed to indicate some real things to be concerned about, one of which was the big jump into fixed income. The bid for fixed income was very strong heading into the close, and there was a nervousness going into the weekend that hasn’t been seen in a while.
Many investors seem to be buying fixed income for protection from a volatile stock market. Earlier this week, some investors may have been avoiding the FAANG stocks but were buying others. Today, the selling was broader, and the overall feeling was one of people not wanting to be in equities. It wasn’t so much a “risk-off” as a “risk way off” situation.
VIX shot up above 22 by late Friday after falling below 19 for part of the day Thursday. Volatility is here, and as a long-term investor, you’ve got to consider being ready. If your positions are worrying you, you might want to consider hedging or trimming. It might be prudent to plan for this type of volatile action through this month and probably well into next.
Crude oil seems to have hitched a ride with the stock market once again, plunging 2% Friday as stock indices retreated. Fears of reduced trade possibly could be leading to concerns about falling energy demand.
The one thing that could knock trade war fears off the top of the list starts next Friday as financial industry results kick off the Q1 earnings season. A week from today, that could become the number one story. Until then, this choppiness is likely to continue.
Looking back at Friday’s jobs report, there’s no doubt the headline number of 103,000 new jobs disappointed. Still, long-term investors might want to take it with a grain of salt for a few reasons.
First, employment growth has been churning along at a pretty heavy clip for many months, and the unemployment rate sits at 4.1% (nearly a 20-year low). At this point in the cycle, there simply might not be as many workers out there to hire, and companies might have filled many of the positions they needed to fill. That means lower headline numbers could become the norm rather than the exception. However, that wouldn’t necessarily be bearish, because the economy only needs about 100,000 new jobs to be created each month to keep up with population growth, according to the Bureau of Labor Statistics.
Second, no single month is a trend. It always pays to look at the longer-term average with these things, and average jobs growth over the first three months of the year was just over 200,000. That’s not shabby at all, and could be one sign that the underlying economy remains healthy despite recent stock market gyrations.
One more thing to consider is the weather in March, which featured several huge storms in the heavily-populated northeastern part of the country. This could have slowed jobs growth slightly, and perhaps we’ll see a corresponding uptick in the April number if the storms pushed back some companies’ hiring plans. A moderate drop in construction jobs last month might be one hint that weather played a role in slowing overall employment growth.
Another potentially positive impact of the jobs report, from the market’s perspective at least, is that it pushed down the odds of a fourth rate hike this year, according to the CME Group FedWatch tool. The interest rate complex saw a drop in yields that might have corresponded in part to the employment data, though trade fears also probably played a role. By the close Friday, the benchmark 10-year Treasury yield was back down to 2.77%, from highs well above 2.8% Thursday. That could change quickly depending on the next set of economic data, but for now it does seem like another speed bump on the journey toward 3% that some analysts had warned about earlier this year and that helped spook the market a couple of months ago.
Speaking of rates, investors heard once again from Fed Chair Jerome Powell Friday, who said in prepared remarks that he expects the labor market to remain strong and inflation to move up in coming months and stabilize at around 2% “in the medium term.” Powell also pointed to what he said have been “steady income gains, rising household wealth, and elevated consumer confidence.”
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