Can May Decipher April's Trends?

It's hardly great news, but the fact that job destruction was a bit less destructive last month will inspire the optimists that the recovery has begun.

Nonfarm payrolls shrunk by a relatively modest 20,000 last month, or roughly a quarter of the monthly losses that have been posted in each of the previous three months of this year. The April reprieve, if we can call it that, certainly made a graphical impression. As our chart below shows, last month's softening in job losses ended a five-month stretch of decelerating conditions for minting new employment opportunities. By that we mean that for the first time since last October, the trend last month didn't worsen compared to the previous month. And while we're pointing out reasons to be cheerful, let's note that the jobless rate ticked down to 5.0% in April, slightly better than the 5.1% for March.

But let's not get carried away, at least not yet. Let's not forget that goods-producing employment is still getting hammered even as the broader employment picture offers reason for hope. Meantime, Wall Street is eager to see light at the end of this tunnel, as yesterday's stock market surge suggests. Yet another rate cut by the Fed earlier in the week helped get the bulls' hearts racing, as did an improvement in the dollar in forex markets. And as we noted yesterday, April generally was a good month for most asset classes.

So, what's the problem? As always, there's no shortage of things to worry about. But no one should underestimate the stock market's capacity for climbing this year's wall of worry. Mr. Market is always looking forward while many of us are overly focused on the past. Such is the limitations of being stuck with wetware as the primary tool in the business of asset management.

In any case, the fact that the S&P 500 is still well below its all-time high of last October suggests a case for adding a bit of risk exposure to portfolios that have shed equity weighting in the correction of recent months. By that standard, it's still possible to see yourself as a contrarian if you're buying stocks today vs. last October.

In my humble and perhaps flawed opinion, however, it's still not time to load up portfolios with a super size dosage of risk. For starters, the rebound of April may be noise. Consider the S&P 500, which suffered five straight months of total return losses through March. Such a string of red ink almost never happens in the broad stock market. The fact that equities posted an extraordinary line of consecutive losses suggested that April would surely witness some degree of gain.

Meanwhile, there's the issue of interest rates. The Fed has slashed the price of money to 2.0% in Fed funds from 5.25% last September. Is this the end? The chatter suggests it is, barring some new calamity that's currently off the radar screen. When and if the economy stabilizes, or starts to show the capacity for sustainable growth again, the central bank will have to start hiking rates, or so one would assume. Is the market factoring in that outlook?

Not yet. Rather, the crowd is looking at the short-term effects of stimulus. That includes the fact that the Treasury begins sending out the stimulus checks this month. The possibility of juicing consumer spending, and therefore the economy may be better than even for the next few quarters.

The question is whether all the stimulus will take root and right the ship to the extent that a new upcycle is set in motion? For what it's worth, we're betting on the idea that the recovery will take longer to bubble than the leading edge of optimists assume. Embedded in our expectation is the worry that the stimulus effect will fade by this year's Q4 and digesting the excess will reveal itself anew in the economic stats. All of which adds up to the possibility of flat lining into early next year on a macroeconomic perspective. As to how the stock market prices ,that possibility is anyone's guess. Traders may have the wind at their backs in such a scenario, but strategic-minded investors can still afford to be patient and selective.

Then again, that's just a guess. No one knows what's coming and so we're all left to apply reason and logic in a space that's notoriously immune to such efforts. So it goes.

Nonetheless, we'll be looking closely at the data that rolls in for May for signs, anecdotal or otherwise, that April's rebound was something more than just an uptick in a deeper downturn. Meantime, we're still digesting April's numbers.

Comments

[Thomas888]

I suppose when the DJI is back to 14000 then everybody willget bullish and then start to buy into the rebound. But will that be the top of the trading range? Just my view but it could happenm Many times in thepast the market climb the wallof worry while the majority were on the side lines waiting for the allclear signal to buy in but the all clear signal doesnt get sent out so they wait in vain till its on the news how much the market has recovered and then youll here DJI 15000 or higher. But will that be the time to buy in? Or is it now with DJI at 13000?Time will tell.

[bearfund]

There's no such thing as an all-clear. You want to know what's happening, look at earnings. They're awful, and the outlook is worse. Analysts are still blowing sunshine while CFOs are battening down the hatches. Oil prices haven't even started working their way into the price pipeline, and with option ARM recasts on the way as well I expect a death blow to residential real estate (my signal will be a bearish NAR report, which has never before been seen). Don't assume it will be isolated to California; much of the rest of the nation's real estate markets are supported by Californians selling out and buying elsewhere. Oops. Credit card debt is rising, proving what everyone already knew: American consumers are tapped out and have been living on borrowed money, and time, for decades. Inflation expectations are "contained"? Ask the guy in Vermont how he's going to heat his house this winter and then tell me what's "contained." If I were him my plan would be to chop down a room a month and burn it for warmth, then write my friendly banker a Dear John in April. Put it all together and history will discuss Q1'08 as a precursor, not the main event.

When earnings start rising and valuations are low, that's your buy signal. If you find yourself early but the signals remain, average down. But right now we have high valuations and miserable earnings. The smart money is selling this rally. The traders are buying it with tight stops and the adrenaline rush that comes with the knowledge that you've just bought a sure loser in an irrational bull market (C? uhhh...I'll give you 16 if you throw in a 2010 15 put for free). The fools actually believe. Don't be the fool. If you haven't the guts to trade it, sit on the sideline with equal parts gold, cash, and defensive multinationals. You won't make any money but you'll do a lot better than the schmucks buying long-dated Treasuries (I'd love to know what they're thinking), and when the time is right, you'll strike.

[gordon]

The BLS added 267,000 PHANTOM jobs, using the birth-death model formula, including financial and construction jobs exceeding those they added in April 2007. www.bls.gov/web/cesbd.htm

It was a LOSS of 287,000 jobs, if you take this out.

[helplessobserver]

The carnage in the long bond market will be horrible when the bond vigilanties start pricing in 5 - 10 percent inflation. Losses there will make equity losses look like chump change.