Stocks Still in the Sweet Spot

Piloting an airplane is said to be composed of 99 percent boredom and 1 percent sheer terror. Similarly, life on Wall Street is often 90 percent tedium and 10 percent pure adrenaline and excitement. Currently, though, we are in the midst of a quiet period where the Federal Reserve is in the cockpit and in complete control.

Sure, technology stocks have taken a temporary tumble recently, but blue chip stocks are holding their own. With the Fed signaling its continued willingness to do what it takes to get the economy going, there’s not much reason for those stocks not to continue on their upward path.

In this tightly controlled, artificial market environment, the recessionists are once again looking silly after last week’s release of fairly strong jobs data. The ADP Employer Services figures showed the U.S. economy created 191,000 jobs in the month of March. That was ever so slightly below the 195,000 that economists polled by Bloomberg were expecting. But ADP’s February reading was also revised up sharply to 178,000 from 139,000. So on net, it showed that the steady, consistent addition of 150,000-250,000 jobs month in and month out that the Fed is targeting is basically on track.

The stock market likes the recently released employment numbers.

What’s more, the Labor Department issued the official employment report later in the week. The official release on the job market confirmed that the economy created 192,000 jobs in March, which was slightly below official forecasts (around 200,000) and significantly less than the “whisper” numbers that were up as high as 250,000. But February’s reading was also officially revised up to 197,000 and weekly hours worked were adjusted upward as well.

After all the variables where accounted for, the unemployment rate stayed at 6.7 percent. This fits with last week’s other reports, which showed auto sales improving along with the weather, and manufacturing activity solidly in gradual expansion territory.

With the unemployment rate now nearing the Fed’s target of 6.5 percent — which would be the lowest level in more than five years — it’s a well-known fact that the labor market is still far from vibrant. Indeed, much of the decline in unemployment has been the result of a large number of Americans dropping out of the labor force.

That’s why instead of pinning guidance on an exact level of unemployment, the Fed is implementing a new strategy where it will show a “willingness to keep rates low” as long as inflation remains below its 2 percent target.

Recently, new Fed Chair Janet Yellen told Congress that the Fed would pause its tapering of asset purchases if there was a “notable change” in the economic outlook, and increase asset purchases again if there were “a significant deterioration in the economic outlook — either for the job market or if inflation would not be moving back up over time.”

The bottom line is that we are continuing to see an economy growing at a tepid pace with no recession warnings flashing. But we’re not seeing a significant acceleration, either. The stock market likes the recently released employment numbers because it suggests that the Fed will not become more aggressive with its tapering program.

What all of this means for investors is that we are likely to remain in the sweet spot for stocks for a while longer. It’s an environment characterized by tepid economic growth and low inflation that I described in a recent Money and Markets column.

I recommend that you consider purchasing the iShares Core S&P 500  (IVV) and the WisdomTree Trust MidCap Dividend (DON) on any market pullback to add to the stock component of your portfolio. Both ETFs are extremely liquid and their underlying holdings are highly diversified. They are a low-fee way to capture the upside in this highly correlated market where individual stock picking is not being rewarded.

Best wishes,

Bill

Bill Hall is the editor of the Safe Money Report. He is a Certified Public Accountant (CPA), Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP). Besides his editorial duties with Weiss Research, Bill is the managing director of Plimsoll Mark Capital, a firm that provides financial, tax and investment advice to wealthy families all over the world.