Is the Bull getting tired?

Will a weak jobs number be followed by apoor earning season?

Not a rosy employment number….

Last Friday morning brought the much anticipated jobs number with a consensus estimate of 200,000 jobs added in the month of March. Several days in advance, whisper numbers started to be heard with the number closer to 150,000 jobs. Friday’s report was a shocker as we only added a miserly 88,000 jobs in March. The market was down shortly after the opening by 170 points in the Dow Jones average. The bad news can be good news did take over throughout the day as the market closed down only about 40 points for the day.

The jobless rate fell to 7.6% which seems at odd with the small number of new jobs added. The reduction came from the fact that nearly a half million folks dropped out of the labor force. We now have the smallest percentage of the working-age population in the workforce in a generation. Only 63.3% of the working-age population was either working or actively looking for a job last month. That is the lowest since May 1979, a time when participation in the workforce by women was just ramping up.

According to Joshua Shapiro, chief economist for MFR, the drop in the participating rate has been centered on younger workers. Many of them have given up hope of finding a job and have continued to go to school. This causes them to rack up more student loan debt which is contributing to the rise in consumer debt. In fact, the average 25 year old has a loan balance of $25,000 and there is a 17% default rate on student loans. This could be the next bubble.

The older workforce is hanging on to their jobs longer as the value of their homes and retirement accounts are diminished and they are working longer to afford
retirement.  The new Fiscal policy adding a 2% payroll tax hike is not helping things. Retailers laid off 24,000 workers last month which is leading many to worry about what retail sales reports are going to come in soon. The weak labor force is not so much about firings as a lack of hiring.

 What is Dr. Copper telling us?

Copper is often referred to as “Dr. Copper” as in “ a Ph.D 
in economics”.  Copper is economically sensitive as it is used in many areas of the market such as construction, telecom, automotive and electrical industries. When these industries begin to add capacity, it is most often a sign that things are
picking up. The inverse is true as they start to slow.  The price action of copper has a high correlation with the equity market and tends to lead the direction of the equity markets.

After a boom from the late 90’s, copper’s bubble popped along with the equity markets. However, copper bottomed in late 2001, long before the equity markets bottomed in early 2003. Copper topped out in May 2006, 17 months before equity markets made new highs in October 2007. Copper prices bottomed in early 2009, two months before equity indices hit their bottom in mid-March 2009. Copper hit a high in early 2012 and has been trending down ever since while stocks have been on a tear since the Fall 2012.

While copper prices could reverse and both stocks and copper could go on to hit new highs, copper recently breached a key support level. That is generally not supportive of higher price action.  Further downside may lie ahead.

Market Action

The first week of April saw stocks pullback across the board. The past winners are the ones who suffered the most while money rotated into the defensive sectors. The plethora of ETF’s makes it easy to track a variety of indices.  After more than doubling over the last 16 months and rising 13% in the first quarter, homebuilder’s ETF (XHB) fell 3.8% last week. The ishares MSCI Emerging market ETF (EEM) extended its 3.6% first quarter drop by another 2.7% last week. The Russell 2000 ETF (IWM) – which is the benchmark for small cap stocks – fell 2.9% for the week after rising 12% in the first quarter.

The S&P 500 lost 1% for the week after rallying 10% in Q1 while the Nasdaq 100 lost 1.6% after only rising 6% for the quarter as Apple’s negative performance put a drag on this index. Money rotated into defensive names as you can see by the Consumer Staples SPDR ETF (XLP) which lost only 0.28% for the week after a 14% Q1 gain. Health care was also a beneficiary as the ETF (XLV) added 0.9% on top of a first quarter rise of 15.4%.

The market will now turn to earnings season which begins with bellwether Alcoa on Monday night and ends  the week with JP Morgan on Friday. The last several years have seen the old adage “sell in May and go away” hold true as the markets have corrected anywhere from 10% to 19% over the summer months. Many fear that this year’s May will be April as the markets have gone a number of months without a significant correction.

The “don’t fight the Fed” cry from the institutions and the bulls has so far worked. However, if the underlying economy is really heading for a significant slowdown, the equity markets will suffer. Remember another adage…Bears make money, bulls make money but pigs get slaughtered. If you have nice gains, you may consider scaling some off the top or adding some protection.

Advisory services are provided by Morse Capital Partners. This information is provided for general information only, and is not intended as personalized investment advice. Reading the above is in no way intended to be a substitute for individualized investment advice, and no conclusions should be drawn from this information regarding any potential investment. Past performance of any index, market, sector, or investment is not necessarily indicative of future returns. Some information in the above is gleaned from third party sources, and while believed to be reliable, is not independently verified. Please contact Kathy Boyle for more
information at kboyle@chapinhill.com.