• It was a solid finish to the week, with stocks recovering as strong US jobs data brightened the economic outlook.
  • The S&P 500 managed to recover from 3730 lows back towards 3850 and closed in the green for the week.

It was a strong finish to the week for US equity markets, which surged higher after a tough three days. The S&P 500 finished the day 2.0% higher to close near 3850, a more than 3.0% rally from intra-day lows around the 3730 mark. The Nasdaq 100 finished the session up 1.6% to close in the 12600s, bouncing roughly 3.7% from intra-day lows around 12200. The Dow ended the session up 1.85%, close the 31500 mark. The CBOE volatility index dropped nearly 4 points, taking it back into the 24.00s.

In terms of the sectoral performance; the S&P 500 energy sector again faired the best amid further crude oil market upside (WTI surged $2.50 to end the week at multi-year highs above $66.00), closing the session 3.1% higher. Meanwhile, the Consumer Discretionary sector was the underperformer, gaining just 0.7% on the day and dragged to the bottom of the sectoral performance board by continued underperformance in Tesla shares, which cratered another 3.8% on Friday.

Friday’s recovery meant that the S&P 500 managed to close the weak in the green, up 0.8%. The Dow ended the week 1.8% higher, while the Nasdaq 100 still ended the week 1.9% lower, though is at least now just 8.8% down from recent highs, meaning that it is no longer classed as being in “correction” territory.

Stock Market Reaction to US Jobs Report

In the first few hours following the release of a much stronger than anticipated US Labour Market survey, stocks were choppy and indecisive. Some desks had argued that a strong jobs report would exacerbate fears about the US economy overheating and the Fed being forced to step in to curb inflation by raising rates or tapering their asset purchase programme sooner than currently priced by markets. There were also fears that a much stronger than expected report would trigger a further surge in US bond yields, itself a negative for equity markets (and particularly negative for high price-to-earnings ratio stocks, like Big Tech).

The fact that US bond yields did not surge in wake of the data (well, they did but the move higher was only very fleeting, and yields are back to broadly flat on the day) seemed to set the stage for equities to stage a bit of a recovery. Indeed, Friday’s jobs data strengthens the idea that the US is on course for a very strong economic recovery.

Meanwhile, it is worth remembering that while stocks have been under pressure in recent weeks amid fears about higher long-term interest rates, inflation and a Fed that has not come across as dovish as the market had hopes, the US economic outlook has unequivocally brightened; 1) as Covid-19 infection rates in the country have dropped the easing of Covid-19 restrictions has accelerated, 2) the vaccine rollout has accelerated and 3) Congress remains on course to pass US President Joe Biden’s $1.9T stimulus bill into law by mid-March and hopes for a follow-up multi-trillion-dollar infrastructure-focused spending bill are high. All of these positives bode very well for earnings growth.

US Labour Market Data Review

The US economy added 379K jobs in February, well above expectations for the economy to have added 182K. But the labour market performed better than the headline NFP number suggests; the private service sector 513K jobs as the easing of economic restrictions allowed hospitality, retail and leisure sector-related jobs to return. Meanwhile, the manufacturing sector added 21K jobs, but construction saw 61K in job losses as a result of bad weather. Moreover, local and state government employment dropped by 69K, a trend most desks expect not to continue, particularly with further fiscal stimulus incoming.

Had February not seen freak weather conditions in much of the country and had government jobs not surprisingly fallen, markets might easily have been looking at a +500K job gain. Assuming that conditions in the US economy continue to improve in March; i.e. lockdown restrictions continue to ease as the prevalence of Covid-19 drops and the vaccine rollout continues, further large gains should be expected to continue. These employment gains might accelerate from April as the economic tailwind from US President Joe Biden’s $1.9T stimulus bills kicks in (assuming it gets passed into law by mid-March and stimulus cheques are sent out within a few weeks).

The US unemployment rate dropped to 6.2% unexpectedly (consensus forecasts were for the unemployment rate to remain unchanged at 6.3%), as the gain in employment outpaced the rate at which workers returned to the workforce. The participation rate remained unchanged at 61.4% (but actually was down about 50K). Total employment levels are still about 9.5M below their pre-Covid-19 levels in the US. Even if the rate of job gains does pick up to about half a million new jobs per month (which would probably be an over-optimistic forecast), that implies it is still going to take into 2023 before the US economy reaches full employment.

That means the Fed will (inflation permitting) continue to sit on its hands with regards to interest rates. Indeed, the Fed may even be targeting an unemployment rate of below pre-Covid-19 levels given recent rhetoric on how it seeks to create “inclusive” full-employment; that likely means that, say, if White unemployment is at 2.5% but minority unemployment remains at say 6% (implying a national unemployment rate of say 3.5%), this would still not constitute full employment for the Fed. In other words, they are taking a more dovish interpretation of their full-employment mandate than they ever have before.

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