Stocks are getting a boost after the market viewed Friday’s jobs report positively. Don’t expect the gains to last.
This week, the
has gained 0.4% to 5120 after a Friday pop, while the
is 1.3% higher and the
is rising 1.1%. The indexes bounced back from early-week lows after the employment report revealed that the U.S. added fewer jobs than expected in April—but enough to indicate a still-growing economy. For now, that could help keep a lid on inflation, prevent the Federal Reserve from needing to raise rates again, and maybe even allow it to cut them.
Investors responded as if they’d finally gotten the signal to jump back in the market. Not quite. The reality is that there isn’t enough evidence that the central bank is about to cut rates. On Wednesday, Fed Chair Jerome Powell kept the federal-funds rate unchanged, and while he signaled that he would like to lower rates, conditions weren’t right yet. Friday’s payrolls report didn’t even increase the odds that the Fed will act in July all that much—there’s just a 62.9% chance that it will remain on hold, down from 66.2%.
“The Fed just told you: ‘We’re not hiking but we don’t have the confidence to cut yet,’” says Seaport Research Partners macro strategist Victor Cossel.
That makes the stock market vulnerable to declines. While Friday’s rally felt encouraging in the moment, it wasn’t all that convincing. The S&P 500 is still 2.8% below its record high of 5265, and it hasn’t been able to retake its 50-day moving average near 5130. Until it convincingly climbs above that important technical level, buyers should think twice about betting on a continued rally.
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If it can’t breach 5130, “that’s not a good thing,” says Matthew Tuttle of Tuttle Capital Management. “There are a lot of money managers that have hard and fast rules—they will not buy the market under the 50-day.”
The S&P 500 has support near 5000, but if it breaks, the next stop would be the 200-day moving average of about 4700, which represents an 8% drop from here. That average is historically where buyers have tended to come in to prop the index up, as long as nothing has changed dramatically for the worse.
Such a drop could be in the cards. While the 10-year Treasury yield dropped to about 4.5% this week, it has been rising for much of the year, and RBC notes that the move up resembles the one that caused the S&P 500 to drop more than 10% from the end of July to the end of October. Indeed, when the 10-year yield was at 4.5% in mid-November, the S&P 500 was at 4500.
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Advice to investors: Don’t buy the dips—sell the rips.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
