Today, the Labor Department reported that in April there were
223,000 jobs created. The unemployment rate continued its slow march southward,
decreasing to 5.4%. While unemployment does not account for the historically
low labor participation rate, the important news for the markets was a return
to trend after a slowdown in March. The March jobs report was revised even lower
to just 85,000 jobs created.
The market reaction was significant, with both bonds and
stocks rallying on the news. This is the nature of the markets today, that both
stocks and bonds move in tandem, and not in line with historical correlations.
The market was “saying” that the news was positive, but not positive enough to
initiate a June Fed rate hike. Thus, speculation on the Federal Reserve, and
not company fundamentals, largely determined the value of assets. We are
skeptical of a rally built around the postponement of the inevitable, but are
not naïve to the powerful impact low interest rates continue to have on equity
prices. Thus, continued low rate are likely to be positive for stocks; but,
buyer beware when this current interest rate trajectory changes course.
