Jobs Up, S&P 500® Index Down

Key takeaways:

• Equity markets paused following a strong run, with the S&P 500® Index registering the worst week of the year.
• Strong payroll growth is consistent with a strong macro environment and evidence of a soft landing.
• Inflation data will be released next week, with notable pressure from supply chains and commodities.

Drivers of market movement

Equity markets paused following a strong and steady run, as strong economic data and hawkish Fed commentary weighed on indexes. Through much of the past six months, investors have treated good news as good news, with increased confidence in a soft landing, while this week that reaction shifted, with strong economic data causing concern over the direction of Fed policy. Thursday saw the worst day for the S&P 500® Index since February, as Minneapolis Fed President Kashkari became the latest official to suggest that no rate cuts are possible this year if inflation remains sticky. With roughly 90% of the S&P 500 in an earnings-related share buyback blackout, a major source of support and demand for shares is absent. Following a 27% rally since October, a period of consolidation for markets is neither unexpected nor unhealthy. The relatively modest pullback in equities from record levels despite a substantial rise in interest rates and the shift in Fed expectations reflects the market’s resilience.

Investors continue to take advantage of the attractive money market rates, with cash funds attracting $71 billion of inflows in the latest week, the best result in three months, bringing the total assets for the group to $6.1 trillion. Retail investors have consistently been allocating to money markets, while institutions and companies have recently seen outflows due to tax payments. Equity market positioning is extended, with JPMorgan’s Market Intelligence report showing positioning in the US in the 90th percentile, while Goldman Sachs’s CTA report shows global equity positioning in the 100th percentile.

Nonfarm payrolls surged by 303,000 in March, much better than the 205,000 consensus and the best level since last March. The unemployment rate remained steady at 3.8% due to a strong jump in the labor force participation rate to 62.7% from 62.5% as workers returned to the workforce. Wage gains remain well above the pace of inflation, growing by 4.1% from a year ago, marking the 55th straight month of gains greater than 4%. The strongest job gains were seen in health care (72,000), government (71,000), leisure and hospitality (49,000), and construction (39,000). In reaction, the odds of a rate cut in June fell from over 60% before the announcement to roughly 50% after, with less than three cuts now priced in for the year. The strong payroll report was echoed by an encouraging JOLTS job openings report, which showed 1.4x the number of job openings relative to unemployed individuals.

The upcoming earnings season commences next week, and Bank of America’s Corporate Sentiment Indicator has surged to a near-record high; notably, this indicator has historically served as a robust leading indicator for earnings. The Magnificent 7 is expected to be a significant driver of earnings growth, with the group forecast to grow by nearly 4%, while the value sectors (primarily commodity-focused) are expected to fall by nearly 10%. Growth expectations for the year have held steady at 11%, though the reliance on margin expansion and a second-half surge are risks.

Inflation expectations are surging, with the 1-year breakeven inflation rate derived by the TIPS market now above 1%. A report from the San Francisco Fed showed that supply-driven factors primarily caused the upside to January inflation, while demand factors drove February’s upside. Services prices remain steadily higher as strong wage growth forces companies to raise prices, while core goods inflation is rebounding due to commodity prices and supply chain challenges. The Bloomberg Commodity Index has been up nearly 4% in the past month, with crude prices up 20% this year, reaching the highest level since October. The ISM manufacturing prices paid component jumped to 55.8 in March from 52.5 in February, the highest reading in 20 months.

Details on performance

Equity markets were lower this week on shifting expectations for Fed policy, with the S&P 500 registering the second-worst week of the year despite losing less than 1%. The Dow lost more than 2% while the NASDAQ lost nearly 1%. Growth indexes beat value, while large caps outperformed small caps. Leading sectors for the week included energy, communication services, and industrials, while healthcare, real estate, and consumer staples lagged. Volatility was elevated, with the VIX closing above 16 for the first time since last November, while trading volume was average.

Global markets were mixed, with the MSCI EAFE® Index performing roughly in line with the S&P 500, while the MSCI Emerging Markets® Index was flat. Asian markets were mixed, with 2% declines in Japan and South Korea in sympathy for the domestic decline, while China managed a 1% gain in a holiday-shortened week on encouraging macro data. European markets were lower on rising interest rates and sluggish economic data, causing the Stoxx 600 Index to lose 1%, driven by 2% losses for Italy, France, and Germany. Latin America was mixed despite strong commodity prices, with Mexico up 1% and Brazil down 2%. The trade-weighted dollar index was fractionally lower for the week.

Interest rates continued their march higher this week on strong macro data and hawkish Fed commentary, with the 10-year Treasury yield up 0.17% to 4.37%, the highest level since November. The 2-year yield rose 0.08% to 4.71%, resulting in a flattening of the yield curve. Credit spreads were higher, though they remain well below average. Commodity prices continued their strong run, with the S&P Goldman Sachs Commodity Index up 3% for the week and 12% in 2024. Crude prices jumped 4% to $87, the highest level since October, with gas prices up 14% this year. Precious metals surged, with silver up 10% and gold up 4% to a new record high. Agricultural commodities were mostly lower.

Investor sentiment moderated this week, with the CNN Fear & Greed Index down to 60 on a scale of 0-100 from 69 last week. The AAII Sentiment Survey showed bulls declined modestly to 47% from 50% last week, though it remains above the historic average and more than double the number of bears at 22%. As mentioned, investors continued to add to money market holdings, with $71 billion of inflows in the latest week. Equity funds experienced modest inflows of $2 billion, while bond funds added $9 billion according to ICI.

What to watch

Inflation is back in focus next week, with readings on CPI on Wednesday and PPI on Thursday. Other notable data include the NFIB Small Business Index on Tuesday and consumer sentiment on Friday. The minutes from the recent FOMC meeting will be released on Wednesday.