Jobs and cheap energy will power US stocks

The US economy is producing jobs again on a big scale. January’s nonfarm payroll growth of 257,000 exceeded expectations and there were sizable upward revisions for December and November.

This creates a strong 336,000 average for the past three months and a trend of exceeding 200,000 for 12 straight months.




Jobs are back

Leading the way for job growth was retail. This is notable as post-holiday patterns are typically weak in this area. Other sectors with gains included construction, healthcare, manufacturing and professional services.

Oddly, the widely followed unemployment rate climbed from 5.6% to 5.7%. The quirky nature of this number was greatly affected by more people entering the labor market and looking for jobs.

This was seen in a labor force participation rate that climbed from 62.7% to 62.9%.

Another measure of unemployment that includes discouraged and underemployed workers moved from 11.2% to 11.3% for roughly the same reason just mentioned.



Wage growth over the past year has not been as impressive. January did provide a 0.5% increase in wage growth.

This is encouraging but follows a modest decline in December and the annual growth rate in wages remains subdued at 2.2%.

A potential leading indicator of employment, average weekly work hours, was unchanged at 34.6 hours.

Overall, this is a good set of numbers and the markets are also viewing it that way with equities higher and long-term interest rates moving higher as well.


The Fed

Such optimism is putting the spotlight on the US Federal Reserve and when there will be a move to raise short-term rates.

Fed funds futures are confidently calling for a modest rise by October with potential for an announcement in July.

The Fed’s current policy language includes the word “patience.”

If this word is pulled after the Fed’s March meeting, a summertime move becomes more certain in my opinion.


Oil patch

It should also be noted that the Fed has recently recognized international economic weakness in its report and energy layoffs may have an impact on job growth.

On balance, in my opinion, the positives outweigh the negatives and July looks like the most likely month for the Fed’s first move.

In 2015, equity market conditions have been volatile with January being weak. As of early February, the major stock indices are at break-even levels.


Central banks

Globally, central bankers outside of the United States are aggressively easing. The Bank of Japan has been at it for a while.

The European Central Bank recently announced quantitative easing, while China’s central bank reduced bank reserve requirements.

The central bank in Australia reduced rates as well.


Currency war

Taken together, these moves have depreciated non-dollar currencies, suggesting a “currency war” in which countries chase export growth at the expense of other countries.

We are also seeing adverse earnings hits to US multinational companies with big export businesses.

On the other hand, the net benefits from lower energy prices are still developing, which should be a plus in consumer spending and the US economy and stock market.

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Photo Credit: Kheel Center via Flickr Creative Commons

DISCLAIMER: The investments discussed are held in client accounts as of January 31, 2014. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment ­recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.