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Stocks Rally on Jobs Report

Market Digest – Week Ending 5/3

Stocks surged this week as jobs growth for April exceeded expectations, home prices spiked, the ECB cut rates, and Italy successfully formed a government over the previous weekend. The Fed generated some uncertainty Wednesday when it said it may either increase or decrease the current bond purchase program later this year, based on developments in the jobs market and inflation. Treasuries fell for the week, primarily as a reaction to Friday’s jobs report.

Weekly Returns:

S&P 500: 1,614 (+2.0%)

MSCI ACWI ex-US: (+2.4%)

US 10 Year Treasury Yield: 1.74% (+0.08%)

Gold: $1,469 (+0.8%)

USD/EUR: $1.312 (+0.7%)

Major Events:

  • Monday – Italy conducted a successful debt auction with the 10 year yield dropping below 4%.
  • Monday – The US Treasury announced it expects to reduce outstanding debt this quarter for the first time since 2007.
  • Tuesday – US home prices were up 9.3% year over year in February, according to the Case-Shiller 20 city index.
  • Tuesday – Apple sold $17 billion in debt, the largest single corporate bond deal in history.
  • Wednesday – The Federal Reserve’s policy statement said the central bank will press ahead with its current $85 billion in monthly bond purchases and may either increase or decrease the amount later this year based on jobs and inflation. It was the first time an increase in purchases from current levels was suggested.
  • Thursday – The ECB cut its key interest rate by 0.25% to 0.50%.
  • Thursday – The spire was lifted to the top of One World Trade Center. Once installed, it will bring the tower to its final height of 1,776 feet.
  • Friday – Employment picked up more than expected in April and the jobless rate dropped to 7.5%. Stocks rose and Treasuries fell.

Our Take:

This week’s jobs report was encouraging, but it wasn’t that good. Meanwhile, factory orders for March were down more than expected. That stocks jumped this weak indicates broad investor expectations were probably even lower than official estimates. Likewise, in our conversations with individual investors, many more discussions involve fear of heights than fear of missing out. This creates a nice wall of worry for the market to climb. It won’t be straight up, but additional good economic news should have the power to bring more gains.

To us, the biggest risk remains Europe, not slow job growth at home. Italy’s ability to sell debt this week at low rates indicates the capital markets are optimistic. We are less convinced the danger posed by the problems in Southern Europe is behind us, but time is our friend. The longer the debt markets remain sanguine, the longer Europe will have to turn the corner and grow itself out of the worst case scenarios.

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