Small gains today as we head into the worst earnings season since the Great Recession.
The March jobs report turned out stronger than expected, with payrolls rising 215,000, beating the consensus estimate by 10,000. The unemployment rate ticked up to 5% from 4.9%, as the labor-force participation rate increased slightly to 63%. Average hourly earnings increased 0.3% on a monthly basis, ahead of the 0.2% expected.
Also on the economic front, the ISM manufacturing index returned to growth with a 51.8 reading in March from 49.5 in February (anything over 50 indicated month-over-month expansion). This is the first expansion in seven months.
In the end, the Dow Jones Industrial Average gained 0.6%, the S&P 500 added 0.6%, the Nasdaq Composite put on 0.9% and the Russell 2000 gained 0.3%. Elsewhere, Treasury bonds were mixed, the dollar was little changed, gold lost 0.9% and crude oil was slammed 4.3%.
Healthcare and consumer staples stocks led the way with gains of 1.3%, respectively. Energy stocks were the laggards down 1.4%. Tesla Motors Inc (NASDAQ:TSLA) gained 3.4% after unveiling its Model 3 electric vehicle and announcing it had received nearly 200,000 pre-orders (placed with a $1,000 deposit). BlackBerry Ltd (NASDAQ:BBRY) lost 7.5% after a big fourth-quarter revenue miss on weak hardware sales.
The hit to energy prices was driven by potential problems in the eagerly anticipated OPEC/Russia production freeze meeting scheduled for later this month. Bloomberg reported that Saudi Arabia’s deputy crown prince suggested Riyadh wouldn’t sign to a deal unless Iran and other major producers also agree.
That’s a problem since Tehran is focused on ramping production up to pre-sanctions levels (increasing from 3.2 million barrels per day now to around 4 million barrels). Since the Feb. 11 low, both stocks and crude oil have been ramping on hopes of this freeze deal getting done. Failure to deliver now could result in a rapid unwinding of recent gains.
Edge subscribers are well positioned with their ProShares UltraShort Crude Oil (NYSEARCA:SCO) position, which gained 7.8% today for a total gain of 12.5% since first recommended on March 24.
Stocks, overall, continue to look shaky here as breadth narrows and a number of technical indicators push deeper into overbought territory.
Fundamentals remain challenging as well.
The strengthening of economic data will put additional pressure on the Federal Reserve to raise interest rates at its June meeting — putting an end to the recent excitement over Fed chairman Janet Yellen’s dovish commentary earlier this week.
On April 11, the Q1 earnings season kicks off, with analysts looking for a 6.9% year-over-year drop in S&P profits — capping the worst run of contracting earnings since the recession.
And crude oil inventories continue to swell as the global oversupply situation remains. According to Ed Yardeni of Yardeni Research, there are nearly 535 million barrels in U.S. storage, up 13.5% over last year.
As a result, I continue to recommend investors remain cautious with a focus on defensive assets like Treasury bonds and select short plays such as crude oil.