Friday's Employment Situation Report showed unemployment dropping to 3.7% for the lowest unemployment rate in 49 years! New jobs created in the month of September totaled 134,000 (121,000 in the private sector and 13,000 in the public). And hourly wages came in at a 2.8% y/y increase. The sectors creating the most new jobs were: Professional & Business Services with 54,000 new jobs (+560,000 over the last 12 months); Health Care with 26,000 new jobs (+302,000 over the last 12 months); Transportation & Warehousing with 24,000 new jobs (+174,000 over the last 12 months); Construction with 23,000 new jobs (+315,000 over the last 12 months); Manufacturing with 18,000 new jobs (+278,000 over the last 12 months); and Mining with 6,000 new jobs (+53,000 over the last 12 months).
Moreover, both July and August saw sharp upward revisions to their numbers with July going from 147K to 165K (an 18,000 job increase or 12.2%), and August going from 201K to 270K (a 69,000 job increase or 34.3%).
It was another great employment report and clearly shows the strength of the economy.
Weighing on stocks however was the continued weakness in Treasuries and the subsequent rise in yields with the 10-Year closing at 3.22% on Friday.
People are making too much ado about the rise in yields, suggesting it spells something ominous in the market. Don't believe it. It couldn't be further from the truth. People are misinterpreting what's going on.
First, inflation hasn't suddenly run amok. And with interest rates still at historically low levels, it will take a series of rate hikes over a period of years before anybody should even begin to think about rates slowing down the economy.
Second, the rise in rates are more likely tied to traders dumping their bonds before China sells their announced $3 billion worth of U.S. bonds this week. People are simply getting out before China drives bond prices down even lower when they sell. Traders will likely come back into the market shortly thereafter. Or during the auction as yields potentially rise further. But with yields at 3.22% already, and forecasts for yields to only top at 3.50%, the move in Treasuries is likely to soon come to an end.
As for stocks, I couch the pullback as nothing more than profit taking after a spectacular 3rd quarter (one of the best quarterly performances in years).
And with the earnings yield on the S&P at 5.75% (more than 250 basis points above the 10-Year), stocks are clearly the superior bargain, and likely will be for many years to come.
Even though October, which is notorious for its volatility (we've already gotten a taste of that last week), October is also known for being the best month for stocks (volatility notwithstanding). In fact, studies show the months of October, November and December are the three best months in a row. So there's plenty to look forward to.
The economy looks fantastic, and the markets are poised for a seasonally strong fourth quarter.
And that means now.
See you tomorrow,