Market Perspective for May 2, 2014

Stocks turned in a solid week in the face of negative economic reports, signaling the bulls may be ready to push the market higher.  The major indexes gave up a bit of ground on Friday with the S&P 500 losing 0.13 percent. The Dow Jones Industrial Average lost 0.28 percent, while the Nasdaq was down 0.09 percent.

An encouraging sign was the jobs report released today. In April, 288,000 new jobs were created, the fastest pace in over two years. Moreover, figures from February and March were also revised upwards, with 25,000 and 11,000 added to the previously release data. This is certainly a good sign for the economy to have employers adding to their payrolls.

One negative takeaway which will certainly make headlines is the unemployment rate falling from 6.7 to 6.3 percent. While on the surface this appears as a significant decline, the reason behind the drop was the workforce shrinking by 806,000. Unfortunately, the massive drop in the unemployment rate was not because of significant job creation but instead due to hundreds of thousands of people no longer being in the workforce. Currently, the labor participation rate is at 62.8 percent – the lowest in 35 years. This report can be taken in a number of ways. While it’s a very positive sign that the economy is adding workers, it remains troubling that the labor participation rate is so low.

Another notable event of the week was the Dow Jones Industrial Average climbing to a new record. Ignoring the bad news environment it accompanied, it was an important because it is the last of the major indexes to break out. The Nasdaq, Russell 2000, S&P 500, Dow Transports and the Dow Utilities all made new highs earlier in the year. The DJIA was the one lone holdout.

The Dow’s new record was even more impressive because it came in a week when economic data was surprisingly weak. The U.S. GDP report was worse than expected, with misses in important areas such as exports and private investment. Personal consumption was solid, but fueled by government social spending. That is not a sustainable trend over the long-term.

The Federal Reserve reduced its asset purchases by an additional $10 billion as well, on the same day the GDP number was released. The Fed sees economic data in advance, so they knew what was going to be released. This is yet another indication that economic activity will likely pick up over the coming months. It is also clear the Fed is committed to exiting from quantitative easing in the coming months and is not worried about GDP growth.

If a week ago we knew the details of the GDP report, we would have expected stocks to drop rather than seeing a new high for the Dow. What transpired this week, even with the market closing lower today, is a very positive sign for investors. It indicates that investors still have a bullish outlook, despite the headwinds. If we see a few more signs of economic improvement, there is no reason why stocks won’t rise over the coming months.

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