foxex: The Rally Goes Global

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Friday's Headlines

1. U.S. Markets Rally for 2nd Straight Week, but they are not Alone

Markets Close

Dow
26,424.99 +0.15%

S&P
2,892.74 +0.46%

Nasdaq
7,938.69 +0.59%

VIX
12.82 -5.60%

INV Anxiety Index
99.99 Neutral

US 10-Yr Yield
2.501 -0.44%

Year-to-Date

Dow
26,424.99 +14.58%

S&P
2,892.74 +16.37%

Nasdaq
7,938.69 +20.57%

Russell 2000
1,582.38 +18.25%

Crude Oil
63.21 +38.24%

US 10-Yr Yield
2.501 -8.59%

Markets go Green on Jobs

U.S. markets made it two straight weeks of gains, with all major indexes closing in positive territory. The rally is real and today's gains came on the heels of a better than expected non-farm payrolls report that calmed fears of a slowing economy.

The U.S. Jobs market found its footing again in March, as the employers added 196,000 jobs while the unemployment rate held steady at 3.8%. Wage growth slowed a bit, increasing 3.2% year over year - down from the 3.4% rate it hit last month. February's dismal numbers were revised upwards from 20,000 jobs added to 33,000 - still paltry given the trend.

While the headline number is important, we like to look at the real unemployment rate (which includes part-time workers and those holding part-time jobs), which held at 7.3%, and is down 7.9% year. That's a good sign. The labor market is tight, which is a positive given all the concerns about a slowing economy.

The one area where it softened - which could be a big concern if it persists, is the drop in manufacturing jobs in March. That sector posted a loss of 6,000 jobs in March.

Here's where the jobs are in America right now:

Why it Matters

A healthy jobs market is obviously key to a healthy consumer and therefore the economy of the country. If we look at the jobs report from a monetary policy standpoint, which is what the Federal Reserve does when it considers interest rates, today's numbers are an affirmation that keeping interest rates where they are at 2.25%-2.5% is right in the sweet spot. For those fairy tale fans, the Fed is like Goldilocks. It doesn't want an economy that is running too hot or too cold...it wants it just right.

A Global Stock Market Party

Fears of a global economic slowdown are not manifesting themselves in global equity markets. Far from it. Stock markets from Amsterdam to Australia are up double digits. Even the U.K. which is in the midst of political turmoil, is seeing gains, with the FTSE 100 up 10% this year. Take a look at this list of major international stock markets and their returns, year to date. Charts courtesy of Koyfin Charts.

What's the Common Denominator?

Ultra-low interest rates around the world, of course. Investors crave 'Alpha', or, the active return on an investment. Alpha gauges the performance of an investment against a market index or benchmark that is considered to represent the market's movement as a whole. In other words, OUTPERFORMANCE. Central banks around the world have been lowering their interest rates to stimulate their economies as they slow. Lowering interest rates brings down the yield of returns on fixed income assets like treasury bonds.

Treasury bonds are considered some of the safest and least volatile securities available as long as the country that issues them is in relatively good health. Several countries have lowered their interest rates so much that their 10 year treasuries have a negative yield. Put another way, an investor has to pay the country for the privilege of lending it money by buying its bonds. Not a very attractive option for those Alpha seekers.

Take a look at the yields the Treasury bonds from these major countries around the world. If you see pink, it indicates a negative yield. Germany and Japan are all in that camp.

T.I.N.A

With bond yields like that, there is no alternative (T.I.N.A.) to stocks and commodities - the two best performing asset classes of the year, so far. Of the commodities, oil has been ripping higher due to production cuts from OPEC, Russia and the U.S.

James has more on the top stocks in the oil patch in our daily chart, below. Hold on to your helmets.

Next Week

Earnings season is upon us again. This will be the first series of corporate reports for 2019 that will give us a sense of the impact of the slowing economy and the faded tax breaks from 2017 that played such a big role in driving corporate profits higher in 2018. This chart from tradingeconomics.com shows just how strong they were over the past two years.

Profit estimates for the first quarter are only expected to rise 3.5%, down from the 10% growth forecast by S&PCapitalIQ. For the full year, they are only expected to grow 1.5%, on average. In past market cycles that would be a big red warning flag for stock investors. These days, with interest rates where they are, nobody seems to care.

We'll get earnings results from JPMorgan Chase and Wells Fargo on Friday. As one of the biggest banks in the world, JPMorgan has its finger on the pulse of lending, borrowing and banking in every major city on the planet. If you like reading corporate reports, read JPMorgan's, which was released this week along with a long letter from Jamie Dimon, its Chairman and CEO. If I didn't know any better, I'd think he was throwing his hat in the ring for 2020.

Have a great weekend.

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Chart of the Day: Oil Company Stocks Surge as Crude Oil Hits New Highs

Crude oil futures hit a new high on Friday, extending the sharp uptrend that has been in place since the late-December lows. Since those lows, the price of the U.S. West Texas Intermediate futures contract has risen nearly a whopping 50% (as of Friday, 4/5/2019) to a new 5-month high. Much of this strong recovery has been driven by sustained oil production cuts from OPEC and its allies (including Russia) in pursuit of price stabilization. In addition, recent positive manufacturing data from several countries, including China, the U.K., and the U.S., have fueled speculation that a rise in crude oil demand may be on the horizon. Add to this the prospect of a U.S.-China trade agreement, and the near-term future for crude oil looks even brighter.

But if you're not a futures trader, there are still plenty of avenues for getting exposure to crude oil, including through oil company stocks. One of the primary ways to do this is with the widely-traded ETF, XOP (SPDR S&P Oil & Gas Exploration & Production ETF). As the name suggests, this ETF is made up of key oil and gas exploration and production companies. Year to date, XOP is up a respectable 16%, but its performance is nowhere near the crude oil futures contract. However, if you take some of the top holdings of the ETF, the picture changes dramatically. California Resources (CRC), Chesapeake Energy (CHK), and Devon Energy (DVN) are just three of the XOP-component companies that have far outperformed the ETF and the market as a whole. As shown on the chart, these three companies have benefitted massively from the crude oil surge to the tune of around 60%, 50%, and 40% year to date, respectively.

What might investors in these and other oil-related companies expect ahead? Much will depend on the status of the OPEC production cuts and global economic growth prospects going forward. The OPEC cuts may last quite a while longer, but they will inevitably end, likely bringing crude prices down sharply. And though we had some solid economic data this past week (manufacturing and jobs), any subsequent signs of a downturn could reverse recent gains in crude oil.