Investors closed the first week of May on an upbeat note, trimming weekly losses, as a weak ISM manufacturing report raised hopes the Federal Reserve would push back its rate hike timing until later this year or possibly into early 2016.
While the headline ISM was unchanged at 51.5 (any reading over 50 indicates month-over-month growth) the employment subindex dropped to 48.3 — falling into contractionary territory for the first time since May 2013 and hitting its lowest level since September 2009. Wall Street’s logic at the moment means that bad news for the economy is good news for the stock market.
In the end, the Dow Jones Industrial Average gained 1%, the S&P 500 gained 1.1%, the Nasdaq Composite gained 1.3%, and the Russell 2000 gained 0.7%.
Treasury bonds were hit hard again, pushing the 10-year yield to its highest level since the middle of March. Combined with the selloff in eurozone bonds, it seems the fixed income market is beginning to price in a lift in both global GDP growth and inflation, with bond-market derived inflation expectations rising to levels not seen since December.
No surprise then that the “high beta” sectors of the market — those most exposed to the business cycle — are getting a lift with materials and semiconductors leading the way. That lifted the ProShares Ultra Semiconductors (ETF) (NYSEARCA:USD) recommended to Edge subscribers to a gain of nearly 6%. Some M&A news helped with Monsanto Company (NYSE:MON) rising 3.9% after a Bloomberg report said it has approached Syngenta AG (ADR) (NYSE:SYT), up 16.2%, about a takeover.
Even tech heavyweight Apple Inc. (NASDAQ:AAPL) got a 3% lift as supply chain worries surrounding the Apple Watch faded somewhat.
Looking Ahead
I’m looking for a turnaround in the PC/semiconductor supply chain this summer as the industry ramps up ahead of the eagerly anticipated launch of the Windows 10 operating system from Microsoft Corporation (NASDAQ:MSFT) — one that promises to undo the mistakes make with Windows 8.
Just look at the way stocks like Hewlett-Packard Company (NYSE:HPQ) are coming back to life, pushing up and out of multimonth basing patterns. HPQ stock has been on the slide all year long, with the bulls finally starting to show some interest.
The move has pushed up the May $34 HPQ call options recommended to Edge Pro subscribers to a gain of nearly 50%.
Next week, the April payroll report on May 8 will take on outsized importance as the Fed decides to hold off on a rate hike until September or possibly later (June is still technically possible, but very unlikely).
Cleveland Fed President Loretta Mester said today that the next two jobs reports will be key for determining when the Fed will decide to start raising interest rates — increasing the cost of money for the first time since 2006.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
