ECONOMIC AND STOCK MARKET COMMENTARY

The labor market continues to improve, only not at the pace likely needed to accelerate the economic upturn. This point was driven home recently by the report of a lackluster 160,000 increase in jobs in April—a rather disappointing result that was 20% below the consensus forecast and nearly 30% less than the average gain per month over the past year. It would seem that employers, taking their cue from other indications of lethargic growth (including the report of a scant 0.5% rise in first-quarter GDP) were easing up on their hiring. True, the jobless rate did stay near a recovery low of 5.0%, while average hourly wages rose eight cents. Still, the subpar job growth, while not a game changer, did suggest that there may be further headwinds up ahead.

In fact, we think the expansion will move along in fits and starts this year. Although the overall trend should be fairly positive, the recent slowdown in hiring, a possible further drop in inventories, and declining productivity may hold the gain in GDP to 2%, or even less, in 2016. In 2014 and 2015, the rate of growth had been 2.4% each year.

The Federal Reserve is likely to respond with patience, as the latest jobs figures, economic shakiness in the over-seas markets, a possible exit from the European Union by Great Britain, and diminished expectations on our shores may combine to delay any further interest rate hikes until the second half of this year. That should mollify Wall Street. Meanwhile . . .

Profits may continue to stumble selectively, much as they did in the opening quarter, and that is not a welcome prospect for a market that is already generously capitalized. All told, we think earnings will remain mixed, with defensive sectors, such as telecom and health care, doing well, but with cyclical groups, such as materials and energy, still struggling, if to a lesser extent than before, as prices for commodities continue to rebound. Meanwhile…

The bulls and the bears too may stay indecisive, with alternating days and weeks of gains and losses, much as we have seen after the market’s strong advance in the latter half of the first quarter and the opening weeks of the current period. Such a rest period would keep stocks from overheating, which is always constructive.

Conclusion: We think a case can be made for further selective market gains.

Source:  Valueline.com