Why the horrid April jobs report was actually great news for stocks

NYSE trader
  • The April jobs report badly missed estimates on Friday, but the stock market promptly hit record highs anyway.
  • That’s because the market is now in a phase where bad economic news is good news for equities.
  • The biggest fear for investors is an inflation spike that prompts the Federal Reserve to tightening monetary policy sooner than expected. The weak jobs report soothed those worries.
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Bad economic news is now good news for the stock market, as Friday’s horrid April jobs report translated into record highs for the S&P 500 and a spike in tech shares.

April saw an addition of 266,000 jobs, well below the estimated forecast of 1 million. Unemployment rose to 6.1% from 6.0%, bucking expectations for a decline. It was the worst miss since 1998.

But instead of an instant drop in stocks following the April jobs report, the tech-heavy Nasdaq 100 soared more than 1%. And while the more economically sensitive Dow Jones industrial average initially sold off, it quickly reversed into positive territory.

The centerpiece of this apparent disconnect is inflation, which is the biggest risk facing stocks right now, according to a recent Bank of America survey. The worry is that significant rise in inflation will prompt the Federal Reserve to tighten its easy monetary policy, which has long driven bullish sentiment in stocks.

But the significant labor-market weakness indicated by the April jobs report has investors shrugging off inflationary concerns for now. In fact, investors seem to have been emboldened to pile further into tech stocks, which carry the highest and most daunting valuations in the market.

This same dynamic was on full display earlier this week – albeit in inverse fashion – after Janet Yellen’s comments about interest rates needing to eventually rise caused a similarly sharp sell-off in tech stocks.

Going forward, now that the economy doesn’t appear as red-hot as many have thought, inflation expectations decline further. That could, in turn, give the Fed more breathing room to continue its monthly bond purchases of $120 billion and keep interest rates near 0%.

April’s jobs report gives credence to Fed Chairman Jerome Powell’s committment to not even talk about talking about tapering its monthly bond purchases or raising interest rates. Instead, Powell would like to see a string of reports that solidify the idea that inflation is consistently running above its average target of 2% and the economy is near full employment.

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There are varying explanations for why more Americans are not rushing back into the job market. The president of the US Chamber of Commerce called for the end of the $300 supplemental unemployment insurance on Friday, arguing that government stimulus programs have disincentivized employees to return to work.

But Fundstrat’s Tom Lee thinks instead, Americans are afraid to get back to work given that the COVID-19 pandemic has yet to be eradicated.

“Many people are still unwilling to ‘risk their lives’ to get a job given COVID-19 fears,” Lee said on Friday.

Whatever it may be, if the weak jobs reports continue, it could result in a jump in wage inflation as businesses are forced to pay top-dollar for workers.

But for now, as evidenced by Friday’s move in the stock market, bad news is good news.

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The stock market’s inflation fears are overblown as explosive economic growth is primed to create a perfect ‘mix’ for more gains, says a Wall Street chief strategist

Traders and financial professionals work on the floor of the New York Stock Exchange
Traders and financial professionals work on the floor of the New York Stock Exchange

  • James Paulsen, Chief Investment Strategist of The Leuthold Group says stock investors shouldn’t fear inflation.
  • Paulsen told investors in a letter that inflation is only a concern for stocks when real economic growth is weak.
  • The strategist said what matters is not either “inflation” or “growth,” but the “mix” of the two.
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The stock market’s inflation fears may be overblown if explosive economic growth comes to fruition to create a perfect “mix” for more gains, according to James Paulsen, Chief Investment Strategist of The Leuthold Group.

In a letter to investors on Friday, Paulsen said that although inflation may be on the rise,  that hasn’t always meant poor returns for the stock market as long as real economic growth is strong.

And with the post-pandemic reopening in sight, many analysts are arguing real economic growth will be impressive in the second half of the year.

In fact, a monthly Bloomberg survey of economists showed annual GDP expectations nearly double to 5.5% from what experts were predicting just two months ago.

In his letter, Paulsen highlighted the two components that have made up nominal GDP since 1950: annual real GDP growth and annual inflation growth.

The strategist illustrated how a perfect “mix” of these components has led to significant stock market gains in the past. He also said that even when inflation rates are high, the stock market has been able to deliver strong returns as long as real economic growth remains strong.

“Regardless of the inflation environment, if real growth is Low, High, or Super High, negative annual market returns are not that prevalent,” Paulsen said.

According to Paulsen, it’s only when real growth slips to the “super low” level that returns begin to fall.

Contrary to popular belief, inflation isn’t always a bad thing for equity markets. According to Paulsen, when real economic growth is “super-high” inflation has “simply not been important.”

Instead, what’s important is the “mix” of annual inflation growth and real GDP growth. 

The strategist said fears of inflation wreaking havoc on the stock market are not “acute,” “because real economic growth is poised to be spectacular, creating a Mix that has historically been supportive for stocks.”

Paulsen did warn that if real economic growth falters going into 2022 and inflation remains high, that could be a recipe “far less hospitable for stock investors.”

“It’s not just inflation; it’s the mix,” Paulsen concluded.

Read the original article on Business Insider

Markets have had their ‘Santa Claus rally’ but a strong economy could drive stocks even higher, veteran Wall Street bull Ed Yardeni says

Ed Yardeni
  • Stock markets had an early “Santa Claus rally” in November, but veteran bull Ed Yardeni believes there’s more to come next year.
  • “November was one of the best months ever for the market,” the Yardeni Research boss told CNBC. “It broadened quite dramatically the small-cap and mid-cap stocks. It was just a great, great month for the market.”
  • The disappointing November jobs report shouldn’t worry investors, according to him, because it suggests the first quarter will avoid a double-dip recession.
  • Coordinated global monetary policy will continue to enable a bullish backdrop for stocks, he said.
  • Visit Business Insider’s homepage for more stories.

Stock markets may have massively outperformed in November, but expansionary monetary policy could drive them even higher next year, longstanding bull Ed Yardeni told CNBC.

“The market already had its Santa Claus rally,” he said on CNBC’s “Trading Nation.”

“But it just keeps going up anyways, and no matter how much you try to look at it fundamentally, I think the fact is there is so much liquidity with interest rates so low driving the market higher.”

The benchmark S&P 500 index ended November up 11.8%, notching its best monthly performance in 33 years. Its gains reflected optimism around COVID-19 vaccine development and a resolution to US presidential election uncertainty.

“November was one of the best months ever for the market,” Yardeni said. “It broadened quite dramatically the small-cap and mid-cap stocks. It was just a great, great month for the market.”

However, a record number of coronavirus cases in the US and the disappointing jobs report for November is fuelling concerns over the pace of economic recovery. US employers added only 245,000 jobs in November, far lower than the 460,000 expected.

Yardeni, however, believes a ‘V’-shaped recovery is in progress.

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“I really wasn’t that disappointed,” he said of the jobs figure. “Government had a drop of almost 100,000 [payrolls] because census workers just had part-time jobs. Excluding that, we were up over 300,000. Wages were up, and the workweek held up pretty well.”

Not only does he believe the US economy will bounce back sharper by spring next year, but that global monetary policy will enable a bullish backdrop for stocks.

“You’ve got the major central banks just pouring liquidity,” he noted. “I’m not just watching the Federal Reserve balance sheet every week. I watch the ECB, and the Bank of Japan. They’re all continuing to expand their balance sheets.”

Aside from his optimism for the stock market, he recognized the need for further federal aid for individuals and businesses that endured the worst of their fears this year.

“There are a lot of people who have been left behind,” he said. “Either they lost their jobs and now are being threatened with possibly losing their unemployment insurance. And then, of course, there are a lot of businesses who barely survived the first and second waves of this pandemic.”

Read More: Billionaire investor Ray Dalio breaks down how US debt and money-printing binges have formed a ‘classic toxic mix’ that could set it on a downward spiral towards revolution and civil war

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