Today’s employment report shows a surge in jobs, due primarily to rehiring in the leisure and hospitality area. The economy is quickly returning to normal.
The Week That Was
Today’s job report shows a gain of 465,000 private jobs in February, 355,000 of which were in leisure and hospitality. Despite the gains, the number of jobs remains 6 percent below its peak of a year ago.
The good news on the job market is also evident in initial unemployment claims. They averaged 791,000 in February, 50,000 less than in the previous two months.
The rest of the economic news this week was mixed. The ISM business surveys for February show strong increases for manufacturing but sharply slower growth for service companies. The slowdown in new orders for service companies was particularly disappointing, with a reading of 52, down from 62 in January.
However, signs of a slowdown in services may be misleading. An earlier business survey from Markit showed overall service company activity in February was the highest in six years. Both can’t be right.
One thing all the surveys have in common is their agreement that business costs are rising very rapidly. As a result, businesses are raising their prices to their customers.
In a normal cycle, it would take two to three years for the current explosive growth in money to bring on price inflation. This is due to the slow rise in the cost of labor, which is usually under yearly contracts. This time, inflation is likely to appear sooner. Costs associated with COVID and laws raising the minimum wage should shorten the time lag before inflation hits.
Things to Come
The only significant economic release this coming week is Wednesday’s report on consumer prices. Oil and most other commodity prices soared last month. As a result, I believe upcoming reports will show a sharp increase in consumer prices.
With a sharp increase in both measures of consumer prices having occurred a year ago, year-over-year inflation rates will remain very low. However, falling consumer prices in March and April of last year mean year-over-year inflation will show rapid increases in coming months.
Market Factors
Stock prices moved decisively lower this past week, with all five key indexes losing ground. The Nasdaq and QQQs fell by 3 percent, bringing both indexes to 10 percent below their recent highs. Other indexes fell by 1 percent to 2½ percent.
In his analysis a month ago, my technical gu, Joe Bartosiewicz, warned of potential problems resulting from a technical formation. Stocks have already gone through some of Joe’s support areas, with the S&P500 below its 50-day average. His latest key levels for support are around 12,500 for the Nasdaq and 3671 for the S&P500.
With the economic news remaining mostly positive, investors now appear concerned about too strong a recovery, higher inflation, and increases in longer-term interest rates.
Current policies aren’t helping. Both Fed Chairman Powell’s insistence on further monetary easing and the pork-loaded $1.9 trillion “stimulus” bill are feeding concerns about higher inflation.
At yesterday’s close, the S&P500 was overvalued by 13 percent. Therefore, stocks are still vulnerable to further declines. I expect the Fed’s monetary ease to continue to provide a tailwind for stocks to keep the S&P500 above its fundamental value. However, when psychology turns negative, there is no way to know how far a correction will go.
Longer-term interest rates remain well below their fundamental level. We are at the beginning of what I expect will be a major upward move in long-term rates. Fixed-income portfolios should remain very defensive.
Outlook
Economic Fundamentals: positive
Stock Valuation: S&P500 over-valued 13 percent
Monetary Policy: highly expansive