THE WEEK IN REVIEW: April 4 – 10
Blowout jobs number on Good Friday lights the fuse
Despite markets being closed on April 2 in celebration of Good Friday, we still got the Bureau of Labor Statistics (BLS) employment situation for March 2021. Expectations for the “jobs report” were for +675,000 new jobs in March, which would have been impressive on its own accord. However, the actual number came in well past that at 916,000. The unemployment rate also dropped from 6.2% to 6.0%, which is really good news!
Markets went off on Monday after waiting out the long Easter weekend. The S&P 500 set new records, which in my view is always better than the Dow given its broader representative nature. I doubt it was the stimulus that caused this explosion to nearly 4,100 on the S&P 500. A little over a year ago, I remember having conversations with people who thought the S&P 500 would drop below 2,000. (It bottomed out at 2,237.40 on March 23, 2020.) My thinking is that the market feels the Federal Reserve will continue to keep rates low for as long as it can to get unemployment back to pre-pandemic levels.
There has been a lot of talk about the stimulus, but that bill’s impact is not likely even close to being felt and isn’t influencing hiring. In my opinion, the real reason for the stellar employment number is the continued reopening of America thanks to vaccinations. Nearly one-third of Americans have been vaccinated, states are lifting restrictions, deaths from infections are way down, spring has sprung and consumers are confident. That’s my take on why jobs are growing. Businesses are cranking up and markets love all that easy credit out there.
The challenge now is not to flood the engine. Too much liquidity could be bad, and the markets may sense that already. For now, everything seems to be in balance. However, when Federal Reserve Chairman Jerome Powell says the Fed won’t raise rates until at least 2023 while others say we may see a hike next year, the odds of a policy misstep grow when money starts flying around. One indicator suggests the market could be overheating. Recent data from Wall Street’s self-regulatory arm, the Financial Industry Regulatory Authority (FINRA), showed that investors borrowed record sums of money to buy stocks. Run-ups in margin debt can contribute to bubbles and subsequent declines could amplify losses, as last week’s Archegos saga demonstrated.
California Dreamin’
Great news from California! (No, seriously, I mean it this time.) It appears that the state is trying to reopen fully by mid-June. That’s only two months from now and comes after over a year of lockdowns, much economic pain and the likely recall election of Governor Gavin Newsom. It is indeed a powerful testament to the vaccine distribution efforts being made at the state level. The distribution got off to a rocky start in December and January, but momentum has been building since the vaccines began arriving in late January. Without the vaccines, talk of full reopening would likely not be possible.
History will judge whether California, New York, Florida or Texas were successful in their approaches to dealing with the pandemic. But this announcement from California is huge and could be one of the final hurdles to fully reopening our economy and moving forward.
Have I got a great deal for you!
Treasury Secretary Janet Yellen began floating the idea last week that other countries should raise their corporate rates, just as the Biden administration is proposing to raise U.S. corporate tax rates from 21% to as much as 28%. It sounds noble and magnanimous on the surface, but in reality, it would likely be a self-started dumpster fire. In my opinion, it’s the kind of policy mistake on par with forgetting to put the oil plug back on before adding new oil to your car.
From my point of view, a proposal like this, if enacted, is the surest way to blow up our economy. At 21%, we are just below the average for developed countries, which is 21.5%. But at 28%, only three developed European countries would be higher — Portugal, Germany and France. Lower corporate taxes attract corporations, so jobs flow from higher-taxed countries to lower ones. That’s the core fixature of globalization. Now we want countries to “volunteer” to become less competitive? Two words come to mind here: “Bad idea.”
The proposal is confusing and illogical to me. I thought the current administration was pro-globalization and against the “America First” agenda of the prior administration. My concern is that this will disadvantage us competitively, and other countries will cheat and hurt our economy to benefit their own.
Coming this week
  • CPI on Tuesday will shed light on whether we see inflationary signs yet.
  • The Housing Market Index and Housing Starts and Permits will be released on Thursday and Friday, respectively.
  • Consumer Sentiment should be a bright spot on Friday.
  • This week’s other major drivers will include the discussion surrounding the infrastructure bill and the tax bill proposals intended to pay for the infrastructure bill.
Have a great week!