Apr 7, 2015 - Here's what happened in the stock/bond markets last week

Stock Market Analysis

The holiday shortened week was a profitable one for stock investors. As we have seen for much of this year the advance was led by smaller-cap stocks. The Russell 2000 Index, which often mirrors the moves of smaller stocks, gained 1.25% for the week. Larger stocks, like those of the S&P 500, advanced a more meager 0.32%. Overall, the market participated in the rally with almost three stocks advancing for every two that declined.

Of course the story of last week’s gains is actually incomplete. One of the biggest market-moving economic releases is the monthly employment report. This typically comes out on the first Friday of the month. This month was no exception; however the stock and bond markets were closed that day. The futures market was open in an abbreviated session and its reaction was decidedly negative.

What should investors make of the employment data? The headline number, the change in non-farm payrolls, was certainly disappointing. After a streak of 12 consecutive months with job gains of over 200,000, March data came in with gains of only 126,000. This is a decidedly weak number. Every month Bloomberg News surveys economists on their projections for employment. The lowest projection was still about 50,000 jobs higher than reality.

While the headlines are disappointing, there actually was some good news in the report. One is the return of the self-employed or entrepreneur class. According to data from ADP almost half of all jobs in the United States are for companies employing fewer than 50 people. In three of the previous four months we have seen the number of entrepreneurs decline at an ominous pace. There was no doubt that this would eventually lead to poor overall jobs numbers. Fortunately, last month we saw the biggest spike in entrepreneurs since January 2000.

Further, wage growth is on the rise. Personal Income, on a year-over-year basis is up 4.5% suggests consumers are getting in better shape for future spending.

It is also a positive to see continued negativity by pundits towards stocks. We have mentioned how a recent cover story for Barron’s advised the investing public to “sit on cash”. Individual investors, as surveyed by AAII, are growing in bearish unease. The numbers of bearish investors are up 14% in just the last 6 weeks.

Overall, our leading indicators are slightly favorable. In today’s environment we would continue to feature bargain stocks which enjoy good relative value, profitability and relative strength. We would continue to hold moderate levels of equities in client portfolios.

David W. James, CFA

Bond Market Analysis

The bond market rallied higher on the week as Friday’s weak employment data sent yields lower. The 10-Year U.S. Treasury yield ended the week at 1.84%; down 10 basis points. Total returns on Intermediate Treasuries gained 0.5%, while long-term Treasuries advanced 0.8%. For the year, intermediate and long-term bonds have gained 1.7% and 5.1%, respectively.

Employees are enjoying higher wages as year-over-year personal income numbers drift above 4% for the fifth straight month. We often talk about the rule of seven where historical income, spending, and savings average about 7% annually. We have not reached these levels yet, but recent numbers indicate we are trending in the right direction. Personal income and savings are both above 4% for the 5th consecutive month. Unfortunately, the third component, personal spending, which makes up nearly two-thirds of the economy, has been trending towards slower growth (recently only 3.3%).

There is hope for the consumer though, as energy prices remain lower and consumers save at the pump. In addition to the savings and the recent wage growth, the psyche of consumers continues to improve. In fact both the Conference Board and University of Michigan report consumer sentiment is near eight year highs. All of these signs point to a stronger economy ahead, as long as job growth does not stall.

The employment situation turned for the worse on Friday as the Labor Department reported only 126,000 jobs created in the month of March. Economists were much more optimistic as they forecasted an increase of 247,000 jobs for the month only to miss by 121,000. It should also be noted the significant revision to the previous two months which reduced jobs gains by an additional 69,000. More alarming is the fact that the Labor Force Participation Rate continues to decline. The rate is at record lows and the yearly changes indicate the number of workers leaving the labor force continue at an accelerated pace; more than double the historical norm.

Employment is not alone in regards to weaker than expected news. Manufacturing appears to have its own struggles as well. This past week the Dallas FED reported the third decline in three months. Many would suggest the drop in oil might have some impact on the Dallas region, but it appears it is not alone. Of the six regions we follow, all six have shown a decline from the previous month, and four of the six are negative. This would suggest the slowdown in manufacturing is not regionally based but rather nationwide.

As we mentioned last week, weak economic data is often good news for bond investors. The recent weakness in the employment data and manufacturing sectors point to possible opportunities in bonds. Our leading intermediate bond indicators remain favorably positioned and believe opportunities are still present. Investors should continue to hold high quality bonds of moderate durations in this environment.

Trent Dysert, Portfolio Manager