Jobs Report A Game Changer

Tom Sowanick is Co-President and Chief Investment Officer of Omnivest Group, Princeton Junction, N.J.

Today’s release of April’s jobs data was a real game changer for investor psychology.

Over the past several weeks, investors have witnessed initial unemployment claims rise by 70,000 and pushing total claims back to last August’s levels.

This has reignited concern that the economy was beginning to sag. Consequently, investors began to sell risk assets in anticipation that April’s employment data would be weaker than the consensus estimate for a gain of 185,000.

Yesterday, market reaction was quite negative with the S&P 500 Index falling 0.90 percent, gold falling 2.2 percent and 10-year Treasury yields falling 7 basis points to their lowest levels since December 2010. Another notable large decline was the 7.8 percent fall in the price of silver.

Were these price and yield changes justified? I would argue that the only rational price change was the decline in the price of silver. The decline was largely in response to the margin requirement increase set by the CME earlier in the week.

While the decline experience in recent days in other asset classes was not justified, prices are clearly firming today based on the better than expected jobs data.

In the last 3 months, the economy has added 700,000 jobs. This is the strongest 3-month jobs gain since the 1st quarter of 2006 when the economy added 885,000 jobs. Since March of 2010, there have been 1.78 million jobs created.

While not robust, there is clearly a solid job creation trend developing.

The data was clearly strong enough to reverse most of yesterday’s negative performance but more importantly it is restoring investor confidence. The S&P 500 Index so far today has gained 1.35 percent, while gold gained 0.70 percent and yields on the 10-year Treasury increased 5 basis points.

Commodities are also rebounding sharply with oil rising 6.35 percent from yesterday’s lows. Even silver is beginning to show signs of stabilizing after falling 26 percent from last Friday’s close.

While financial markets have become more volatile in recent days, we firmly believe that the US economy will continue to improve during the course of 2011.

Positive trends for stocks, commodities and credit spreads remain intact. The negative trend of a declining US dollar is also still intact. Although the euro has fallen from a high of 1.494 to 1.448 over the past 3-days, the ECB and the FED remain on separate and divergent paths.

The most frustrating asset class has been the stubbornness of Treasury yields not rising. However, we are now quickly approaching the end of QE2 and it will be important to see who, if anybody, replaces the FED as a significant buyer of Treasury debt.