ECONOMIC AND STOCK MARKET COMMENTARY

It is still thumbs up on the jobs front, with the nation’s employment rolls increasing by a better-than-expected 235,000 in February. That put the average monthly gain at 209,000 for the past quarter and at 196,000 for the latest 12 months. The pace of growth is impressive, particularly given the duration of the business upturn and the accompanying low rate of joblessness (4.7%), which implies near full employment. Also encouraging was the fact that wages rose modestly (up $0.06 an hour), while the chronically low labor-force participation rate edged up to 63.0%.

The rest of the business picture is brightening as well, with recent weeks showing further resilience in a range of industrial and consumer categories, including housing starts. Moreover, consistently low jobless claims suggest that the upbeat employment trends cited above will continue. In all, the nation’s economy probably will expand by about 2% in the fast-concluding quarter.

Not surprisingly, the Federal Reserve has resumed raising interest rates, with the central bank having voted for its second quarter-of-a-percentage point rate hike in the past three FOMC meetings on March 15th in a near-unanimous move. Relatively steady economic improvement (especially with regard to employment growth) and a sense that inflation is starting to move selectively higher were likely behind the latest monetary adjustment. We think that the Fed will continue to tighten the monetary reins over the next number of months.

Now, the focus has turned to Congress and the White House, where recent weeks have seen the introduction of proposals on health care, tax cuts, and regulatory issues. However, the mood is increasingly contentious and there are looming questions about the extent and timing of possible legislative action. That seems to have had some occasional ill effects on the stock market. Indeed,

There have been a few dents in the bull market recently, with stock prices having pulled back a bit on concerns about interest rates and, as noted, the doings in our nation’s Capital. Overall, though, stocks remain strong and near all-time highs, with P/E ratios, consequently, still rich.

Conclusion: Given all this, we think a careful and cautious approach to the equity market is warranted at this time.

Source: Valueline.com