Jobs Data Sparks Small-Cap Stocks

Friday, May 03, 2019 - Focus on the price with John Jagerson, CFA, CMT

Chart Advisor | Focus on the Price By John Jagerson, CFA, CMT Friday, May 03, 2019 1. Unemployment drops to lowest level since 1969 2. S&P 500 rebounds off support 3. Russell 2000 completes inverse head-and-shoulders Major Moves The Bureau of Labor Statistics (BLS) kept the train of positive economic news rolling today when it announced the U.S. economy created 263,000 new jobs during April – pushing the unemployment rate down to 3.6%, its lowest level since December 1969.   This number was well above the analyst consensus of 190,000 and is further evidence that the disastrous print of only 56,000 new jobs being created in February was just a one-time fluke.   Traders look for job growth above 200,000 to signal strength in the U.S. economy. Traders typically start, or continue, buying stocks when they see bullish numbers like these because they know more jobs leads to more money in consumers' pockets, which leads to more consumer spending and higher corporate revenues and earnings.   However, traders also know that more money and more consumer spending can also lead to greater inflation – something the Federal Open Market Committee (FOMC) said was weaker than expected in its monetary policy statement on Wednesday.   Traders have been watching inflation closely to determine if the FOMC is likely to hike, or cut, interest rates later this year. An interest-rate hike could dampen economic growth and bullish sentiment on Wall Street. Conversely, an interest-rate cut could spur further economic growth and continued bullish sentiment on Wall Street.   Interestingly, even though the number of new jobs that were created was higher than expected, the increase in average hourly earnings was muted.   Employees only saw their earnings increase by 0.2% last month, a number that is likely too small to apply any upward pressure on inflation. This leaves the FOMC free to pursue its accommodative monetary policy of low interest rates.   This mix of strong jobs growth coupled with low average hourly earnings growth keeps the U.S. economy in a Goldilocks zone where everything is just right. Traders can continue to buy stocks without having to worry about the FOMC raising rates.     S&P 500 After dropping to longer-term up-trending support yesterday, the S&P 500 rebounded to close at its second highest level ever: 2,945.64.   This tells me that after some initial profit taking in the wake of the FOMC monetary-policy statement on Wednesday, traders are reconsidering taking their foot off of the bullish accelerator.   Today's rebound was driven by most of the stocks in the S&P 500 – with 422 of the index's components closing higher on the day – but Amazon (AMZN) played an important role by rising 3.24% after investors learned Warren Buffett's Berkshire Hathaway (BRK.B) is buying the stock.   While that may not seem like a lot, AMZN's market cap of $912 billion makes it an important driver of the market-cap weighted index. Read more: 5 reports that affect the U.S. dollar Key indicators for following the stock market and economy What impact does a higher non-farm payroll have on the forex market?     Risk Indicators - Russell 2000 The S&P 500 and Nasdaq Composite have both climbed to new all-time highs during the past week, but the Russell 2000 has been slower to respond. It has been consolidating just below resistance at 1,600. That all changed today.   The Russell 2000 – the small-cap index of choice on Wall Street – broke above 1,600 for the first time since October 10, 2018, today and completed an inverse head-and-shoulders bullish reversal pattern in doing so.   The resistance level at 1,600 served as the neckline for the pattern, with the left shoulder forming in late-October and early-November 2018, the head forming around Christmas 2018 and the right shoulder forming in March.   Based on the completion of this pattern, the Russell 2000 is now clear to make a run for its all-time high of 1,742.089, which it established on August 31, 2018.   Seeing small-cap stocks joining in the recent rally on Wall Street is bound to give traders added confidence in the strength of the underlying bullish trend. Read more: S&P 500 vs. Russell 2000 ETF: What's the Difference? Is It Time to Buy Small Caps? What Should I Use as a Benchmark for my Small-cap Stock Portfolio?     Bottom Line - Conditions Ripe for More Buying Whether you're looking at the gross domestic product (GDP), the Conference Board Consumer Confidence Index or the nonfarm payrolls numbers that have come out within the past week, the story is the same. The United States economy is doing well.   When you combine this with the strong earnings numbers we are seeing so far this Q1 2019 earnings season, you have the makings of a market environment that is exceptionally beneficial for the bulls on Wall Street.   At this point, market bears stand in front of this charging bull at their own peril. Read more: 2019 ETF Outlook Remains Rosy Berkshire Hathaway Annual Meeting: What To Watch For Learn the basics of investing How can we improve the new Chart Advisor? 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