A better-than-expected payroll gain for February sent U.S. equities soaring on Friday, pushing the major indices back to levels not seen since early January and continuing the recent melt up off of the February lows. Payrolls expanded by 242k vs. the consensus for a 195k print and the upwardly revised 172k figure from January.
The report had a “goldilocks” quality to it: Strong enough to assuage fears of an economic slowdown in the United States but not hot enough to encourage rapid rate hikes from the Federal Reserve. While the labor market is tightening, new entrants into the workforce kept the unemployment rate stable at 4.9%. Moreover, wage gains were modest. All of this was exactly what the bulls were looking for.
In the end, the Dow Jones Industrial Average gained 0.4%, the S&P 500 went up 0.3%, the Nasdaq Composite saw a modest 0.2% gain and the Russell 2000 finished the day higher by 0.6%. Elsewhere, Treasury bonds weakened, the dollar was mostly lower, gold extended its recent gains (the yellow stuff has been unstoppable lately) and oil rallied with crude gaining 4.7% to close at $36.21 a barrel.
Long story short: The inflation/reflation trade was strong as expectations for economic growth were recalibrated higher while expectations for Fed rate hikes remain dovish. Before today’s jobs numbers, the futures market wasn’t expecting a rate hike until 2017. Now, that’s been brought forward to November.
The Fed, for its part, is still officially maintaining its forecast for four quarter-point rate hikes in 2016. But Wall Street analysts widely expect this to be downgraded when the next policy announcement and Summary of Economic Projections or “dot plot” is released on March 16. The consensus now widely expects the next policy tightening to come in June.
As a result, the short-squeeze in materials stocks continued lifting the sector to a 1.2% gain. That lifted the SPDR S&P Metals and Mining (ETF) (NYSEARCA:XME) recommended to Edge subscribers to a gain of nearly 19% since first recommended on February 17. The March $5 calls on Mexican cement maker Cemex SAB de CV (ADR) (NYSE:CX) are up more than 131% for Edge Pro subscribers.
Energy stocks also did well, gaining 0.9% as a group after Baker Hughes Incorporated (NYSE:BHI) reported another drop in the U.S drilling rig count.
On the downside, HD/4K vision system maker and fallen momentum favorite Ambarella Inc (NASDAQ:AMBA) lost 8.9% after fourth-quarter earnings and revenues beat expectations but management noted ongoing deterioration in demand for wearables sports cameras. That’s you GoPro Inc (NASDAQ:GPRO).
Looking ahead, all eyes are on the European Central Bank’s policy meeting on March 10 for the delivery of additional monetary policy stimulus to the Eurozone after some scary volatility at the start of the year. The recent embrace of negative interest rates and the reappearance of sovereign bond default risk has pressured European banks. Deflation is also a deepening problem.
ECB chief Mario Draghi is expected to respond with another interest rate cut and a possible expansion of the bank’s monthly bond purchase stimulus program.
Other factors that have been contributing to the stock market strength include Monday’s reserve requirement ratio cut by the People’s Bank of China and the recent stabilization of crude oil. Technically, market breadth has also been improving as a growing percentage of stocks in the market participate to the upside.
Examples of fresh breakouts include tech titan Apple Inc. (NASDAQ:AAPL) as buzz builds for a product unveiling later this month (a new 4-inch iPhone and new iPads) ahead of the iPhone 7 launch in September. The March $100 AAPL calls recommended to Edge Pro subscribers are up 125% already.
While stocks are overbought on short-term indicators, a break of the Dow’s 200-day moving average near 17,200 should be enough to set up a return to the October-December trading range near 17,700, as well as a possible run back at the 18,000 level that hasn’t been crossed since last summer.
This would invalidate a big, multi-year topping pattern that had been pointing to a possible end to the post-2009 bull market.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
