KEY DATA: ADP: +241,000; Goods: +65,000/ ISM (Non-Man.): -0.7 point; Orders: -5.3 points/ HWOL: up 102,100
IN A NUTSHELL: “Ultimately, the stock markets will reflect the economy and right now, all systems are go.”
WHAT IT MEANS: Another day, another wild ride on the investor equivalent of Disney’s Space Mountain. And like the ride, market participants seem to be operating in the dark. But they shouldn’t be. While a trade war could devastate the economy, conditions right now are quite good. Take the job market. ADP’s look at the private sector always precedes the government’s report, which will be released Friday. If the two are in sync (synchronized, not the boy band), we should get a really strong March employment report. The job increases were spread across the entire economy, with robust increases in construction and manufacturing. Every size firm, but especially mid-sized companies, added workers at a huge pace. The government’s numbers tend to be a bit more volatile than ADP’s, so don’t be surprised if there is a big miss. Even if there is, it is clear the labor market is in great shape.
The Institute for Supply Management’s March reading on the non-manufacturing sector looks just like its report on manufacturing: Conditions have moved from robust to very strong. In other words, things are just fine. Even the large slowdown in order growth is not a major concern. The level of demand remains strong enough that backlogs are growing and hiring is accelerating.
With ADP saying job demand is strong and the Supply Managers indicating that hiring is increasing, it should not have been a surprise to see that the Conference Board’s measure of online want ads surged in March. Every sector, except strangely restaurants, increased their advertising activity. Only in New England did the number of want ads drop. There are a significant number of occupations where the volume of ads exceeded the number of unemployed in that profession looking for jobs. Healthcare and computer sciences are almost devoid of supply and in those as well as a variety of other areas, wage pressures have to be significant.
MARKETS AND FED POLICY IMPLICATIONS: We are entering earnings season and the first quarter reports should be good, if the economy is any factor in creating profits. Where those profits, as well as the gains from the tax cuts are going is not totally clear, but for the first time in history, no S&P 500 company cut its dividend. That says something. Dividends also hit record highs. And stock buybacks are soaring as well, so when you look at the economic and stock fundamentals, it makes you wonder what is going on in the equity markets. Actually, everyone knows. One day, the president is Tweeter-Dee and the next he is Tweeter-Dum and that is creating the looking glass issue for investors. But while equity market volatility may result from the president’s tweet-creating uncertainties, for the Fed members, the fundamentals are clear: The economy is strong. Thus, they will be focusing on the inflation signals. No matter what the headline job number looks like, the data point you want to look for on Friday is wage growth. If that is high, as I expect it to be, start pricing in another rate hike in June. With economic growth so good, the Fed knows it can raise rates without doing damage and that is what the FOMC will do.