Jobs Surge in May … OPEC Takes a Pass on Production … What’s Next?

MARKET ROUNDUP
Dow	-56.12 to 17,849.39
S&P 500	-3.01 to 2,092.83
Nasdaq	+9.33 to 5,068.46
10-YR Yield	+0.10 to 2.402%
Gold	-$4.70 to $1,170.50
Crude Oil	+$1.00 to $58.99

Mama said there’d be days like this – and boy was she right!

First, we learned that the U.S. economy created a much stronger-than-expected 280,000 jobs in May. That was the strongest gain in five months, and above the average forecast of 220,000. April’s number was revised slightly downward by 2,000 to 221,000, but March’s reading was revised up to 119,000 from 85,000.

The unemployment rate did tick up to 5.5% from 5.4%, but that was because more Americans entered the labor force. The labor force participation rate ticked up to 62.9% from 62.8%.

Moreover, average hourly earnings rose a sizable 0.3% on the month (compared with expectations for 0.2%). That was good for a 2.3% year-over-year increase – the best growth since August 2013.

Job growth was also fairly widespread by industry. Construction (+17,000), retail (+31,400), leisure and hospitality (+57,000) and government (+18,000) all added significant numbers of jobs. Mining and energy was a key sore spot, with 17,000 job cuts reported.

Second, the Organization of the Petroleum Exporting Countries (OPEC) kept production quotas unchanged at 30 million barrels a day. There was some chatter they might increase their target, but that argument obviously didn’t hold the day.

Oil ministers from key OPEC countries like Saudi Arabia defended the policy by noting that global oil supplies are starting to come down, and that oil demand is rising around the world. They forecast that prices should continue to climb for the remainder of the year, with $75 a barrel being the general consensus.

So what will the net effect of all this news be? Where does it suggest markets will head next?

Kneejerk trading moves are common after big news days.

Well, the first thing to keep in mind is that the first 24-48 trading hours after big news events like these can be incredibly volatile. You usually see big moves in everything from currencies to stocks to bonds, with some of those swings incredibly counterintuitive. So it’s sometimes best to sit on your hands and let those moves settle out before doing anything.

That said, “good” news on Main Street may be interpreted as “bad” news on Wall Street because it suggests Federal Reserve policy needs to be tighter. It may also send the dollar higher, the last thing U.S. manufacturers and materials companies need considering they are already hurting.

But will the initial kneejerk moves continue? I’m skeptical. The fact is, average Americans should be getting a bigger slice of the economic pie after years of getting the shaft. And if they do, that should be positive for growth here – and by extension, growth in overseas countries we import products from.

So the best play in the wake of these news items may be to buy growth-sensitive stocks in sectors like aerospace, energy and materials. You might also want to look at stocks in non-rate-sensitive sectors like pharmaceuticals. Unlike REITs, utilities, and similar sectors, they shouldn’t get hit by the higher interest rates that are accompanying the recent spate of good economic news.

“The best play in the wake of these news items may be to buy growth-sensitive stocks.”

That’s the general game plan I’m following in my Safe Money Report, where I include specific “buy” and “sell” points to precise names.

In the meantime, what do you think of the latest figures? Is the job market finally improving in a lasting fashion, and is that finally boosting wages in a meaningful way? Or is this just a flash in the pan number, one that doesn’t fit with what you’re seeing in your own backyard? I can’t stress enough how important this topic is, and how much I hope you weigh in over at the Money and Markets website.

Our Readers Speak

Speaking of the job market, you had many powerful, passionate comments about issues like economic insecurity, stagnant wages and foreign competition for U.S. jobs in the last 24 hours. So I want to recap as many of them as I can here.

Reader Frebon said: “The Fed is the problem. If they allowed interest rates to normalize, then banks would loan more because the spread would increase. More middle class people would get a decent return on their bank-related investments, savings would increase, and people would actually spend the money, creating demand and more jobs and wage increases.

“The cheap Fed money has only resulted in massive stock buybacks, M&A (which results in job losses), banks fortifying their capital reserves, and corporations borrowing money to invest overseas. They may be brilliant, data-dependent economists but they sure lack common sense.”

Reader Jim weighed in on the political angle to these issues, saying: “As a long-time conservative, I would like to add that I am weary of the ‘Blame Obama’ excuse for our problems. He was elected twice rather handily. If there is an ideological problem in America, it is with the American voter.

“Poll after poll is showing Americans increasingly favoring Socialistic solutions to problems like poor wage growth and income inequality. Any meaningful examination of the historical record of Socialism reveals its many shortcomings and failures, but our schools and media tend to teach otherwise. Somehow the myth that government can solve these problems continues to persist, when their meddling is probably the source of the problem.”

Reader Books offered some insights on foreign competition jobs, saying: “We’ve allowed our jobs to go overseas since the 1980s, and were told ‘not to worry, the jobs that remained would be good jobs.’ Any fool can realize that if you send millions of jobs elsewhere, there will be millions of people left with an uncertain future. Nobody cares about the average working person.”

Reader Mike P. also weighed in on that issue, offering this take: “Globalization and technology are transforming the world economy. We are in a secular, long-term period where economic wealth is gradually being more evenly distributed around the world. Corporations have fluid borders and are obligated to shareholders to maximize profits.

“The average standard of living across the globe has dramatically increased and continues to rise. Unfortunately for the first world, the rate of increase in wealth relative to the rest of the world is declining. The huge disequilibrium in global wealth distribution was never sustainable in a global economy.”

Finally, Reader Rosalindr talked about one of the base reasons why jobs keep getting shipped overseas – it makes executives richer! Her view: “CEO and manager bonuses are all based on stock prices, and are often paid in company stock. Stock prices go up when expenses go down.

“That means that everything that subtracts from profits must be reduced: employee salaries, bonuses, raises, safety, but not workload or hours. This has been what is driving management for the last few years. Thank the Harvard MBAs for coming up with these belt-tightening cutbacks. It hurts the common workers, but not the CEOs or their highly paid advisors.”

Clearly, these are major, long-term issues that affect the health of our country as a whole. So I really do appreciate all the comments, and hope they keep on coming.

I’m not in a position of government power, nor am I expecting to get a Fed board nomination any time soon. But I can promise you I’ll keep doing my best to help you build your wealth, regardless of what the markets throw your way, through these columns and in my Safe Money Report. In the meantime, be sure to add your comments at the website here when you get a chance.

Other Developments of the Day

China launched a massive hack attack on the federal government, stealing Social Security numbers and other personal information from more than four million current and former workers, according to U.S. officials. The breach at the Office of Personnel Management is the third major foreign effort to tap into U.S. government systems.

Greece failed to make the 300 million euro payment to the International Monetary Fund that was due today. Instead, Greece chose a little-used procedural “out” that allows the country to bundle all of its June payments into one late-month dispersal.

Problem is, that payment will now total around $1.7 billion – money the Greeks can’t afford to pay without additional bailout funds. So the contentious negotiations on economic reforms and fund releases will continue over the weekend in Europe.

The on-and-off acquisition talks between satellite TV company Dish Network (DISH) and wireless phone provider T-Mobile US (TMUS) are reportedly back on. The idea would be to bundle more entertainment and telecommunications options for subscribers to both companies, boosting overall revenue and earnings. No word on price yet, but Dish has a market cap of around $33 billion while T-Mobile has a market cap of $31 billion.

China is performing the difficult task of recovering bodies from the deadly Yangtze River ferry accident earlier this week. Roughly 440 people are missing and presumed dead in the ship, which was righted overnight to make the search easier.

So what do you think of the latest massive hack attack? Will our data ever truly be safe against foreign theft, whether government sponsored or not? How about the latest telecom merger – are you surprised or are you expecting even more deals in the weeks ahead? Let me know over at the website.

Until next time,

Mike Larson