U.S. equities moved lower Friday after a larger-than-expected drop in the unemployment rate. On the surface, this seemed to lift odds of an interest rate hike from the Federal Reserve, sending investors running for the hills.
Yet precious metals and the related mining stocks surged in a big way — ostensibly on higher inflation expectations as the job market tightens. This suggests that many traders don’t think the Fed will rush a rate hike with other economic data points still soft. Instead, a 44% drop in LinkedIn Corp (NYSE:LNKD) on weak guidance hammered the entire technology sector and pulled stocks lower.
Maybe the Fed and the economy was not the tail that wagged the market dog today.
In the end, the Dow Jones Industrial Average begged down 1.3% to remain range bound between 16,000 and 16,500, the S&P 500 took a 1.9% hit, the Nasdaq Composite lost 3.3% and the Russell 2000 ended the day 2.9% lower. Also, treasury bonds were weaker, the dollar was stronger (ending a two-day decline) and crude oil lost 2.2% on lingering oversupply and inventory concerns.
Tech stocks were the laggards down 3.4%. Tableau Software Inc (NYSE:DATA) lost more than 49% after reporting license sales missed for the first time ever on softening IT spending and tough competition. Along with the LKND disappointment, the pain spread throughout the sector with Facebook Inc (NASDAQ:FB) down 5.8% and Netflix, Inc. (NASDAQ:NFLX) down 7.7% to bring the one-time internet streaming momentum favorite down nearly 38% from its December high.
On the upside, Symantec Corporation (NASDAQ:SYMC) gained 3% after posting an earnings and revenue beat and getting a lift from news Silver Lake had made a $500 million investment in the company.
Gold gained 1.4% to push the Gold Trust ETF (NYSEARCA:GLD) to levels not seen since October — up more than 12% from the December low. That pushed the value of the Feb $105 GLD calls recommended to Edge Pro subscribers to a gain of 310% since recommended on Jan. 15.
No surprise that the gold and silver mining stocks are perking up nicely as well, with Kinross Gold Corporation (NYSE:KGC) rising another 13.3% for Edge subscribers to take their total month-to-date gain to nearly 33%. The Market Vectors Gold Miners ETF (NYSEARCA:GDX) is up 16.4% so far this month.
Back to the jobs report. The unemployment rate has fallen below the 5% threshold for the first time since the recession ended, hitting 4.9% for January. But non-farm payrolls increased 151,000 vs. the 190,000 gain expected. Average hourly earnings were a bright spot, rising 0.5% on a monthly basis vs. the expectation of a 0.3% rise. The annual hourly earnings inflation rate increased to 2.5% from 2.2% previously.
We will know more about the Fed’s intentions next week when Federal Reserve Board Chair Janet Yellen makes her semiannual testimony to Congress starting on Wednesday. We will also get another reading on the jobs market when the Job Openings and Labor Turning Survey is released on Tuesday. Friday will bring updates on retail sales, business inventories, and consumer sentiment.
Deutsche Bank analysts expect Yellen to stress patience in waiting to see further improvement on the inflation front given fresh weakness in crude oil prices as well as the tightening of financial conditions from the recent market volatility.
Right now, the single biggest potential catalyst for the market is a reduction in the Fed’s four-quarter-point rate hike forecast for 2016 from back in December. Currently, the futures market only puts a 50% chance of a single rate hike this year.
The economic data supports a dovish stance by Yellen: The chart above, of the Citigroup Economic Surprise index which shows where the economic data is coming in relative to expectations, has fallen back to late 2014 lows.
This is down sharply from the highs seen at the end of 2015 when the Fed decided, based on the economic data, to raise interest rates for the first time since 2006. Clearly, the situation has changed.
And that means the Fed’s previous four-quarter-point rate hike forecast for 2016 is no longer valid. Paul Ashworth at Capital Economics believes the Fed won’t raise rates until June at the earliest and dependent upon disappointing fears about a collapse in China and a U.S. economic slowdown as well as a leveling off of commodity prices.
But we cannot discount the rising possibility we won’t see any rate hikes at all this year as Yellen awaits confirmation that wages, inflation, and energy prices are going to stabilize first.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
