foxex: Jobs!

The Market Sum | INVESTOPEDIA

Insight after the bell

By Caleb Silver, Editor in Chief

Friday's Headlines

1. Jobs and Fed Boost Markets

Markets Close

Dow
23,433.16 +3.29%

S&P
2,531.94 +3.43%

Nasdaq
6,738.86 +4.26%

VIX
21.38 -15.99%

INV Anxiety Index
105.21 High Anxiety

US 10-Yr Yield
2.659 +4.11%

Jobs and Fed Boost Markets

Markets received a double dose of good news on Friday morning, prompting strong relief rallies across the major indexes. From the Dow and S&P 500 to the Nasdaq Composite and Russell 2000 small-caps, stocks surged sharply, erasing losses from the previous day and extending the rebound from December lows.

Before Friday's market open, all eyes were on the U.S. government jobs report. And investors were not disappointed. The headline non-farm payrolls for December far surpassed expectations, pointing to continued strength in the U.S. job market, more than making up for the lower than expected numbers from November.

A whopping 312,000 jobs were added to the U.S. economy in December, against previous forecasts for around 180,000 jobs. Wages also grew more than expected at 0.4% month-over-month. Only the unemployment rate was worse than expected at 3.9% – a rise of 0.2% from the previous month. But this was mitigated by a 0.2% rise in the labor force participation rate to 63.1%.

Signs of slowing global economic growth have weighed on equity markets of late, but Friday's strong showing for U.S. jobs has given the markets some respite from recently heightened volatility and pressure.

Another bullish development for investors happened only a short while after the jobs report, when Fed Chair Jerome Powell said in a panel discussion that the Fed would be "patient" and that "there is no preset path" in raising interest rates or adjusting the balance sheet. This gave investors even further confidence that, despite the strong jobs report, the Fed would unlikely be overzealous in hiking rates.

Why it Matters:

The monthly U.S. jobs report and any significant comments from the Fed are major market events that are among the most widely watched by investors. Generally, markets really like solid job creation because it signifies a strong and growing economy. But what they don't like is when good economic data results in higher interest rates from the Fed – markets generally prefer lower interest rate environments. On Friday, investors got the best of both worlds with a highly positive economic signal along with a patient Fed. With this double dose of good news, the markets would be hard-pressed NOT to rally.

What's Next:

For the time being, markets may be rejoicing about good jobs and a cooperative Fed. However there are still concerns on the table. The U.S. government is still in a partial shutdown, and trade war tensions haven't gone away. If it's neither of these, something else is bound to shake the markets during these still-volatile times. But at least we have some evidence from the stellar jobs report that the U.S. economy may be a bit better off than feared. Below, the chart of the day tells us there may be other reasons for (cautious) optimism.

Beyond the jobs report and the Fed's comments, here's the other important news of the day:

Trump Suggests Shutdown Could Last 'Months or Even Years' (NYT)

I don't know if we were expecting these negotiations to go well or what. In any case, they don't seem to be.

Millennials Load Up on Battered Apple, Facebook, GE

Millennials are buying the dip.

5 Financial Stocks Poised To Survive The Market's Turmoil

If today's uptick doesn't have you convinced we're out of the woods, this is a good read.

China Pours $218 Billion Into the Economy as Growth Slows

Not an uncommon move, but one that comes at a crucial time for a country experiencing an economic slowdown and trade tensions with the U.S.

Chart of the Day: SKEW is Skewing Bullish

Although most market indicators have been generally bearish over the last several weeks the risk indicator that has been most contrary is the SKEW. The SKEW index is produced by the CBOE (Chicago Board Options Exchange) like the so-called "fear index," or VIX. To understand why the SKEW index has been such a standout, and what it means, a little background information is necessary.

If investors are speculating that the market will rise, they may buy call options; if they fear the market will fall, they could buy put options. Call options rise in value in the market rises, and put options rise in value when the market falls. Therefore, if market returns are random, calls should be just as valuable as puts. That's true even if they are far out of the money.

However, since the market crash of 1987, the market has valued out of the money puts (those with a strike price below the market price) more highly than it has out of the money calls. The SKEW index measures how much more the market values out of the money puts than out of the money calls. If investors are very fearful of a market decline, the relative price of the puts (and the SKEW) will rise.

Despite the S&P 500 completing a drop of nearly 20% from the market highs in late December, the SKEW index actually dropped back towards its lows. And as you can see in the chart shown, the SKEW has just established a new long-term low.

Historically speaking, the SKEW index is not a very precise timing indicator. However historical studies have shown that surprise rallies are much more common when the SKEW is low. The inverse is also true, when prices are rising but the SKEW is also very high, investors are pricing in a lot of downside risk and negative price shocks are more common. You can see an example of that scenario in late September when the market was reaching its highs.

The SKEW is a short-term indicator, and its recent "bullishness" should not be interpreted as a signal that the decline has ended all by itself, or altogether. However, if the S&P 500 forms a solid bottom over the next few weeks, historical studies show that a bullish breakout is more likely if the SKEW continues this pattern of forming lows with the market price, which is what happened earlier this year when the market rallied in April.