Investors should expect> a delayed market reaction Monday to last week s news that the private sector has started adding, rather than losing jobs. The payroll gain marks a shift, but leading economists and market observers cautioned against putting too much stock in the report.
The Labor Department reported Friday a net total increase of 162,000 workers on employers payrolls in March, the best monthly result in three years. However, the unemployment rate held steady at 9.7%, and nearly 30% of new jobs were government positions created for the 2010 Census.
That's a promising number, but it s hardly a sign of a healthy economic recovery, wrote Heidi Shierholtz, an economist for the liberal think tank Economic Policy Institute.
"We need much more robust job growth, over a sustained period of time, to significantly reduce unemployment," she wrote Friday. "This morning s report shows that, while things are clearly improving, the private sector is still not positioned to create sufficient numbers of jobs. There is still an urgent need for aggressive policies to create jobs.
On the other hand, just because the recovery is slow does not mean it is hollow. Don Rissmiller, chief economist at Strategas Research Partners, called the March "ex-Census" employment gains solid. He added that the upward revision of 62,000 jobs on prior months' payroll tallies and the March gains of 15,000 in construction and 17,000 in manufacturing were signs that the broader employment picture was poised for more improvement.
"We believe that this report marks a cyclical turning point, nonetheless -- as we are now seeing substantial private-sector job gains," he wrote Friday. "The 'noise' in this report (the Census) was less than expected, so we have a solid 'signal' that we are looking at a sustainable recovery."
ISI Group economist and co-founder Nancy Lazar wrote Wednesday that data suggest companies have the means to hire. Corporate profits climbed 30.6% in the past year, fueled by the global recovery, declining interest expenses, declining labor unit costs and the steepening yield curve, she said. The financial sector reported a 239% increase in profits over that period, and the numbers indicate that critical mass is approaching.
"Surges in both corporate profits and business confidence help explain the increase in [capital expenditures] on equipment," she wrote. "All three suggest employment increases soon."
But an improved labor market is far from certain, as Hussman Funds president John Hussman pointed out in a March 29 commentary. Although it's still possible that this recovery will assume a similar profile to those of 1961, 1965, 1968 and 1987, with employment ramping up along a comparable schedule, that scenario hinges on looser credit markets. After the battering of the last two years, that is still an unresolved question, he said.
"In my view, the most likely outcome is that we will indeed observe serious credit strains in the months ahead," Hussman wrote. "That possibility adds to an already unfavorable syndrome of overextended market conditions, and this mix of factors courts a great deal of potential risk."
The first and most obvious risk for individual investors is a bit of overconfidence, a notion voiced by Gluskin Sheff chief economist and strategist David Rosenberg and Bob Doll, vice chairman and chief equity strategist at BlackRock.
"The market is now overvalued by over 25% but is also extremely overbought, having gone 24 sessions without a decline of 1% or more, and 89% of the stocks in the S&P 500 are now trading above their 50-day moving averages," Rosenberg cautioned on March 29, as the Dow Jones Industrial Average closed in on a 4.1% quarterly gain. "Even if you are bullish on the outlook, one would have to admit that such a parabolic move is vulnerable to at least a modest pullback or more."
Doll agreed in a Tuesday commentary but offered reason for optimism. "In the short term, there is a possibility that stocks may have gotten ahead of themselves, as some technical indicators are looking stretched, he wrote. Nevertheless, an ample amount of cash remains on the sidelines, and the macro backdrop suggests to us that the long-term path of least resistance for stocks continues to be up."
Correction: An earlier version of this article misidentified Bob Doll as the chief investment officer of global equities at BlackRock. His correct title is vice chairman and chief equity strategist.>