Investors expected a large number and Friday U.S. Payroll Outside Agriculture Report delivered it and then some. It was essentially a reversal of the March 2020 report and another strong message that the US economy is on a strong recovery path.
Employment growth is booming
The U.S. Department of Labor reported that March employment growth boomed at the fastest pace since last summer, as increased vaccinations and more government funding for pandemic aid paved the way for what is perhaps the biggest spike in economic growth in 37 years.
Stock futures showed a muted response to the numbers, although government bond yields rose. Wall Street was not open for trading on Friday. March E-Mini S & P 500 Index Futures were open for a short time. They extended profits and rose 0.43%. Note, however, that the volume was extremely low.
The bond market was on a shortened day due to observance of Good Friday. However, the benchmark 10 year bond yield rose to 1.7072%. Two-year government bond yields rose to 0.1782%.
In the forex market, the US dollar index firmed up about 0.16%.
The pent-up volatility is likely to hit the market early next week after investors took the weekend to process the data.
The markets are about to transition
What I mean by “markets about to transition” is that what has worked in the recent past may not work anymore. This particularly applies to correlations. Specifically, the relationship between returns and stocks, returns and the US dollar and possibly returns and gold.
There is no hard and fast rule that needs to be followed. It’s just an observation of a sudden change in price action that tells us that conditions are changing.
Investors tend to position themselves there when there is a strong trend. However, when conditions start to change the reaction is often volatile as trend traders have been surprised by the change in fundamentals.
For example, there was a time when all three stock indices were moving in the same direction. Then the pandemic and growth stocks rebounded more than the value games. Then the vaccine rollout began and investors sold growth stocks and bought value stocks in companies that would benefit the most if the economy reopened.
Every time the market switched, some investors were caught on the wrong side of the trade. I’m trying to give you a reasonable chance of making the transition before the majority of investors do.
For weeks we’ve been trained to believe that rising interest rates are bad for stocks. However, that outlook may already be changing. Friday’s job report showed that the economy had definitely turned for the better. When it does, the chances of inflation spike increase and returns increase. But it also means that the economy is improving quickly and that is good for business.
So if you come to work on Monday, don’t be surprised if stocks rise along with government bond yields. Yes, both can go off at the same time. This means that Wall Street has fully accepted the fact that interest rates will rise as the economy increases.
This also means that stock market investors do not see higher returns as a disadvantage, but rather as a sign that the economy is warming.
My point is not to become a robot and sell stocks just because returns are increasing. The ship may have sailed. In other words, investors may have already “stepped” into another set of fundamentals.
If the topic that professionals follow has changed and you’re still clinging to the old topic, you might be licking your wounds by the end of next week.
Finally, if I had to guess what the next topic is about, it will be whether the Fed will be ready to admit it is wrong and eventually announce that it needs to change its policy sooner than expected. Start looking for articles about it. Remember to be a successful investor. You have to be willing to think ahead.
Take a look at our economic events today Economic calendar.
This items was originally published on FX Empire