Stock prices are supposed to do a decent job of foreshadowing economic turning points, both good and bad.
In March 2009, just when it looked as if the U.S. economy was facing a final meltdown, the equity market rebounded from 12-year lows — correctly assessing that the end wasn’t nigh, after all.
Last fall, when stocks began to roar again after stumbling through the summer, the bullish case was that the economy finally was on the verge of a sustainable rebound, one that would begin to create jobs in significant numbers.
On Friday, the government’s report on April employment provided vindication for the optimists. The U.S. added a net 244,000 nonfarm jobs last month, the most since last May.
More important, the private sector led the way, adding a net 268,000 positions, the largest total for any month since February 2006. April’s hiring pace marked the third straight month of private-sector job gains exceeding 230,000.
It’s still not nearly enough, given the loss of 8.6 million jobs in 2008-09. But it’s a dramatic improvement from the second half of last year, when businesses added jobs at a monthly average rate of just 125,000.
The report was much better than most analysts expected. Yet with other data in recent weeks suggesting the economy has softened lately, the stock market mustered only a tepid rally Friday and finished lower for the week.
The Dow Jones industrial average surrendered most of a 174-point early gain to close up 54.57 points, or 0.4%, for the day at 12,638.74. The index lost 1.3% for the week, but it’s still up 9.2% year to date.
The equity market is trying to keep the faith against bearish messages from other key markets. Slumping commodity prices and falling Treasury bond yields both seem to point to the risk that the economy is losing more momentum after a relatively weak first quarter.
Although hiring unquestionably picked up in the quarter, U.S. gross domestic product grew at an anemic annualized rate of 1.8% in the period, down from 3.1% in the fourth quarter, according to government data.
And much of the national economic data this week were disappointing, especially a steep jump in weekly unemployment-benefit claims and a sharp slowdown in the service sector of the economy in April.
If investors and traders needed an excuse to take profits in commodities after eight straight months of gains, the data this week were obliging. A rush to sell sent the Thomson Reuters/Jefferies CRB index of 19 major raw materials tumbling 9% for the five days, including a 1.1% drop Friday.
A bursting of the silver market bubble helped fuel dumping of commodities across the board. What’s important to watch now is what happens with commodity players’ sense of fundamental global demand for oil, wheat, aluminum and other materials.
And with many commodities, U.S. demand is far less important than emerging economies’ appetites. That’s where the risk is rising, as China, India, Brazil and many other emerging-market countries continue to tighten credit to slow growth and battle inflation.
India, for example, this week raised its key short-term interest rate to 7.25%, up from 6.75% and the ninth increase since March 2010.
Still, it’s early to be making too much out of the commodity pullback. An abrupt slide in raw-material prices also occurred in mid-March, with the bulk of that drop following Japan’s devastating earthquake and tsunami. The market then quickly recouped all of its losses.
If it fails to do the same this time around, however, investors will be forced to ponder whether the economic outlook is in fact growing darker.
In the meantime, the drop in commodity prices to this point ought to be welcomed by stock investors. Crude oil in New York ended Friday at $97.18 a barrel, down nearly 15% from $113.93 a week earlier. If that translates into lower gasoline prices, or at least brakes the rise in pump prices, cheaper crude will be unambiguously good for consumers.
The action in the Treasury bond market might be more worrisome for some stock market bulls than the downdraft in commodities.
Treasury bond yields have fallen for four straight weeks. The 10-year T-note yield, a benchmark for mortgage rates and other long-term rates, ended Friday at 3.15%, down from 3.55% a month ago and the lowest since early December.
Typically, investors seek relative safety in Treasuries when they fear economic or geopolitical trouble that could knock riskier markets for a loop.
William Dudley, head of the Federal Reserve’s New York bank, acknowledged Friday that the economy in recent months was “somewhat softer than anticipated.” But that weakness will “probably prove temporary,” he said at a news briefing.
The bond market doesn’t yet see it that way. But the problem with using the Treasury market as an economic barometer is that yields are being skewed by the Fed’s purchases of government bonds. The central bank committed in November to buying $600 billion in Treasuries as a way to pump more money into the financial system and hold down longer-term interest rates.
That program will wrap up June 30. In the meantime, the Fed’s purchases this quarter will more than exceed net new bonds issued by the Treasury, brokerage UBS estimates.
That implies that it doesn’t take much additional demand from private investors to pull yields lower. In other words, the steep drop in yields over the last month may not be signaling a true rush for safety stemming from fear of a serious economic slowdown.
So far, the stock market isn’t giving up on the recovery. The average New York Stock Exchange stock is off just 2.8% from the market’s 33-month high reached a week ago.
Even so, as with commodity prices the trend in bond yields from here will be critical in shaping expectations for the economy. If raw materials keep sliding and Treasury yields fall further, the stock market will have to wonder what those markets know that it doesn’t.