All eyes all week long will be on Friday’s report on March jobs from the Bureau of Labor Statistics. Economists surveyed by Bloomberg project that the economy will add 642,000 new jobs in the month and that the official unemployment rate will drop to 6.0% from 6.2% in February. That would keep the economy on track to hit a 4.9% official unemployment rate by the end of 2021 as per the Federal Reserve’s most recent economic update. That would still be above the 3.5% unemployment rate for 2019, before the pandemic gut-punched the U.S. and global economies. That rate was the lowest official unemployment annual rate since 1969. And a drop to 6.0% unemployment would be a strong sign that the U.S. economy is on the mend.
Exactly how the financial markets will react to that good news is an open question.
Bond markets could decide that the big increase in hiring is a sign that wage inflation is just around the corner. Inflation worries have kept the pressure on bond prices and sent yields climbing. The yield on the 10-year Treasury ended Friday, March 26, at 1.68%, up 5 basis points on the day and up a full percentage point in the last 12 months. A spike in yields on this job market good news would send stock prices tumbling in all likelihood.
Or financial markets could decide that this is confirmation of the kind of big economic recovery that everyone has been hoping for and expecting in 2021. This would be especially true for the stock market, which has shown signs of doubt recently that economic growth in 2021 might not be the 7.5% to 8.1% that Wall Street is predicting right now. A drop in the official unemployment rate would argue that those projections are on the money and stocks would rally.
(You’ll notice that there is the possibility that the actual numbers will be good but not as good as the projected 6.0% unemployment rate. I think news that shows the unemployment rate continuing to fall from the 6.2% rate in February will be treated as good news in the scenario that I’ve sketched above. A big miss could indeed rattle markets–if the miss is big enough to raise doubts about GDP growth projections for 2021.)
Lots of moving parts for Friday and the March jobs report. Investors have to not only predict the actual unemployment rate to be announced on Friday but also the market reaction to that rate.
My own handicapping of the situation says that Friday will give us a big increase in the number of jobs created in March and a dip in the unemployment rate. Further after the growth nervousness I’ve detected in stock market action over the last couple of weeks, I’d expect the stock market to move up on that good news and the bond market to show a very modest increase in yields. (Not enough of an increase to send stocks tumbling.)
Am I willing to bet the farm on that prediction (assuming I owned a farm)? No way. As you can see there are just too many unknowns of fact and sentiment.
But I would be willing to buy a couple–no more–of the most attractive recent buy-on-the-dip candidates in my Dip-O-Meter on JubakAM.com. I think the odds are in favor of an upward trend in stocks for the next month or two. Besides Friday’s like to be good jobs report, we’re now lapping some of the worst months of the pandemic economic shutdowns in 2020. That will make year-on-year comparisons look good. And even if that’s just a statistical artifact, it will help the bullish case on Wall Street over the next couple of months. Just for the record, I’m still focusing my worries on the Federal Reserve and its inevitable announcement that it is considering cutting back on its monthly $120 billion in bond purchases. I still believe that the financial markets will see that as the first step toward higher interest rates in 2022 or 2023. I still see such an announcement in the July to September time period and I’m looking for a pull back in stock and bond prices on that schedule.
Until then, I think there are some profits to be made by careful investing. At least that’s my strategy right now.