By most accounts, the U.S. payrolls numbers were a delight – so why aren't stocks rallying?
In mid-morning trading on Friday, the S&P 500 was up just 1 point or less than 0.1 per cent, to 1,545 – surrendering earlier gains. Sure, that pushes the benchmark index to a fresh five-year high and close to 1 per cent shy of a record high.
But next to the upbeat payrolls, the gains are puzzling. U.S. payrolls expanded by 236,000 in February, blowing past expectations for 165,000 job gains and nearly double the gains of the previous month. The unemployment rate fell to a four-year low of 7.7 per cent from 7.9 per cent.
Economists described the report as "solid" and "encouraging." But if the stock market's reaction is any indication, investors have taken a cautious response.
Or have they? The modest move by the S&P 500 masks an underlying move away from defensive stocks and into economically sensitive stocks.
That is, industrials, materials and consumer discretionary stocks showed some of the biggest gains, rising 0.4 per cent each. That suggests growing confidence in the economy.
Conversely, consumer staples and utilities – seen as ideal holdings when times are tough – fell 0.2 per cent and 0.1 per cent, respectively. (There were a couple of outliers to this trend toward cyclicals: Financials fell 0.1 per cent and telecom stocks rose 0.6 per cent.)
Meanwhile, the year-to-date moves remain muddled – probably owing to uncertainty related to U.S. budget cuts – with no clear distinction between cyclical stocks and defensives. Health-care stocks (defensive) are the year's best performers, with a gain of 10.9 per cent. But financials (cyclical) are second, followed by staples (defensive) and consumer discretionary (cyclical).
If investors get a clearer sense of the economic direction or Washington comes to an agreement, that muddle should disappear.