Bulls were hoping for a strong Friday close, and while it was not a rip-roaring close, it did allow the major indices to close out the week with a much-needed win. All three of the majors are at or near their all-time high, depending of course how you measure all-time highs or all-time “closing” highs. They usually occur in tandem, but either way, Friday’s late-day rally left the major indices near their highs of the day, and it was a great way to cap off a relatively flat and quiet week. For the first five trading days of May, the three major indices finished with weekly gains of 0.3% for the Dow, 0.9% for the Nasdaq and 0.6% for the S&P 500.
The good news on Friday came from the government jobs report for April that showed 211,000 new jobs, which topped expectations of 190,000 and was way up from March’s revised 79,000. The unemployment rate dipped to 4.4% from the previous 4.5%, which was more “good” news. However, skeptics of the government report were quick to note that the job creation and decrease in unemployment level were likely the result of minimum wage or non-full-time jobs. That is great news for anyone getting a new job, but these jobs are not exactly the higher-caliber, permanent jobs that drive an economy.
Friday’s report did give the Federal Reserve some cover, though, if it wants to continue forth with its plans for at least a couple of more rate hikes in 2017. The Fed held steady on Wednesday when it left rates unchanged, and that steadiness neither pumped up the stock market nor cause any sort of selloff. Investors basically shrugged on Wednesday and stocks remained flat, but Fed watchers were still wondering what the Fed was thinking. We saw a very neutral statement from the Fed following Wednesday’s calm and cool announcement, which was what most Fed watchers had expected.
What we saw on Friday, however, were speeches around the country from six Fed Heads, including Janet Yellen, and the themes seemed to focus on “flexibility” with regard to Fed policy. There were some comments regarding inflation targets and other Fed tools, but the vibe was that the Fed would remain cautious, data-driven, and engaged in its interpretation of economic news. It is confusing to digest the comments from SIX Fed members speaking on the same day, but it was a plus for these members to get out there and try to make sense of an economy that is a head scratcher.
What stands out most is the final first-quarter GDP number of a dismal-looking 0.7%. For having interest rates near zero for eight-plus years, many economy watchers are wondering why the economy is not performing better by now. The buzz has been that the Fed kept rates too low for too long and that the near-zero rate policy may have run its course. This is why the Fed is so enthusiastic about keeping on course for more rate hikes. The problem the Fed is facing is that without strong economic numbers, particularly employment and GDP numbers, any rate hikes could harm both the real economy and investor sentiment.
If you were Janet Yellen, would you really want to hike interest rates when the stock market is floating around at all-time highs? It has been years and years since we have anything even resembling a market meltdown, and the last thing Chairman Yellen would want to do is create a “Dow Falls 1,000 Points” headline. This might explain why the Fed Heads were out on the road Friday touting “flexibility” for Fed policy as we head toward the later half of 2017. By the way, expectations are high for second quarter GDP, and the consensus right now is for a 3.0% GDP number for Q2, which will be released on July 1st.
Three percent is a pretty big jump from the final 0.7% reading we saw for Q1, so it seems as though the 3% estimate will likely be revised lower unless, of course, the second quarter is already hitting on all cylinders. Recent earnings news and the mixed economic news we keep seeing suggest that 3.0% is going to be a difficult number to hit, so we will keep a close watch over what economists chime in ahead of the July 1st reading. It was a solid week for the stock market, though, and for the time being, investors are not all that worried.
Global “hot spot” issues seem calmer, although we do have the French election on Sunday. Oil prices fell sharply this past week, which raised a few eyebrows, but crude did bounce back by about 2% on Friday. Thus, the decline we witnessed might have been just a blip. We will see how next week unfolds, so stay tuned for what will likely be a very telling week. That said, the Gorilla wishes each and all a relaxing weekend. The Kentucky Derby is on the docket, and the best part is the names of the horses! It should be a great race, and maybe someday there will be a horse named “Gorilla Trades.” Yes, that is humor! Have a great weekend, and we will be back in action on Monday!
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