Special Comment: Strong job gains reaffirm our positive outlook.


  • March job gains surpass expectations and reinforce our positive outlook.

  • The employment report suggests a “Goldilocks” scenario: not-too-hot and not-too-cold.

  • Updates on Brexit and China trade negotiations suggest reduced international risk.

  • Our outlook is positive, but risks remain…as always.

March job gains surpass expectations and reinforce our positive outlook.

The larger-than-expected increase in March job growth (196,000) reported Friday reinforced our view that the U.S. economy is sound, and that the consumer remains healthy and is able to spend despite recent volatility in the statistics.  We believe this underlying labor market strength, augmented by a friendlier Federal Reserve monetary policy and improved prospects for a trade deal with China, will maintain positive momentum for incomes, confidence, sales and corporate profits in 2019.  Risks remain, as always, but we have avoided most of the potential self-inflicted wounds highlighted in our Via Nova Worry Checklist for 2019 that could derail this record economic expansion and the bull market for stocks.

The employment report suggests a “Goldilocks” scenario: not-too-hot and not-too-cold.

The March report was consistent with the underlying economic fundamentals and continued growth.  Investors had become worried about the strength of the consumer and the economy after jobs grew by a scant 33,000 in February.  Our view a month ago was that the soft employment growth in February was a predictable response to the huge 312,000 increase in January – abnormal moves in one month are often offset in the following month.  The March report was relatively “clean,” and the increase was comparable to the average gain over the past year.

The employment report showed continued job growth, but limited wage pressure – the “Goldilocks” combination sought by the Federal Reserve, which is charged with the dual mandate of maintaining a healthy labor market without high inflation.  The unemployment rate remained at a very low 3.8% and average hours worked ticked up by small amount, which support further income growth.  But average hourly wage growth eased to 3.2% year over year pointing to limited inflation pressures.  The report suggests consumer incomes will continue to rise, but the Federal Reserve will not yet feel pressured to raise interest rates due to relatively low inflation.  Bond yields are down over three-quarters of a percent since last fall, which is good news for interest-sensitive sectors like the housing market as well as the stock market.  Stock investors also prefer stable interest rates and inflation as reflected in the healthy first quarter performance.

Updates on Brexit and China trade negotiations suggest reduced international risk.

U.S. /China trade negotiations have been going almost nonstop in recent weeks, and the comments from both sides suggest an agreement may be near.  Trade tensions have been a dark cloud over the equity market for over a year.  Following a meeting with Chinese Vice Premier Liu He on Thursday, President Trump said that swift progress had been made, adding "we'll know over the next four weeks" whether a deal can be reached.  On the Chinese side, the official state news agency Xinhua said a new consensus had been reached by both countries on the text of a trade agreement.

Via Nova believes there is a strong chance of some form of trade agreement with China in the second quarter.  Like most negotiations, however, compromise is often a crucial element to progress, and we do not believe the U.S. will get all the items on its wish list in an initial deal.  Key elements that we do see as likely include a significant reduction in the trade deficit with China, greater access to China’s financial markets, an increase in the number of U.S. majority-owned companies in China, a forum to address disputes on intellectual property, and some framework for the re-imposition of tariffs in the event of an agreement violation.  We do not expect the iron-clad protections for U.S. intellectual property demanded by Wall Street, as it might impose too much stress on China’s long-term economic development plans.

If such a deal is forthcoming, economic growth would increase and companies would have greater clarity on funding new investments.  This combination should provide a meaningful boost to the equity markets in the coming quarters.

The risk of a disorderly exit by Britain from the European Union has also been near the top of our Worry List, especially with a deal/no deal deadline looming.  However, the stalemate in the UK Parliament prompted an offer from European Council President Donald Tusk allowing the U.K. a 12-month "flexible" extension to leave the EU.  While kicking the can down the road is far from an ideal outcome, it suggests a willingness to seek an orderly agreement on both sides, which is good for markets.

Our outlook is positive, but risks remain…as always.

Via Nova’s outlook for the economy and the stock markets remains positive and was reinforced by the March employment data as well as the latest trade developments.  We believe the economy will remain in an expansion at least through the end of this year and into 2020.  However, the combination of a record-long government shutdown as well as the efforts by companies on both sides of the Pacific to minimize the impact of trade tariffs injected distortions and volatility into the economic data painting an alternating hot then cold picture of the economy.  While the data volatility is probably not yet over, the March employment report suggests that the dire recession predictions by some have been at best premature and we believe incorrect.

First quarter earnings growth will likely be flat from a year ago as the boost from corporate tax cuts hits its anniversary, but a reacceleration is likely in the second half of the year.  We believe investors and the markets are already sensing this improvement and have begun returning to the stock market, especially companies that have been adversely affected by trade and rising interest rates such as technology, industrials and housing.  We believe stocks can continue to rise as our positive outlook plays out in the coming months.

The outlook is not without risks, however, and we are monitoring them closely for signs of deterioration.  Our top worry of excessive Federal Reserve interest rate hikes appears to have been marked off the list, as has the record government shutdown.  A trade deal with China appears close at hand, though nothing is guaranteed when it comes to international negotiations.  Not surprisingly, markets have responded favorably to the positive developments. 

That said, there are other risks that may be more difficult to resolve completely if at all.  The House Democratic Game Plan aimed at building support for a 2020 presidential victory is off to a flying start and promises to generate a steady stream of provocative headlines that could keep investors nervous about specific sectors and about a major shift in tax policy.  Energy prices have been rising significantly in 2019, which is good for oil producers, but above $60/barrel begins to have a noticeable impact on gasoline prices and future inflation.  Corporate earnings guidance has been wary and uncertain during the trade negotiations, but the hope is greater clarity will return in the second half.  And while China trade talks are progressing nicely, trade talks with the EU have had limited success and could turn contentious later in the year.

The stock market tends to climb a “wall of worry.”  Significant progress has already been made so far in 2019, and we believe that stock prices can rise to new record highs later this year.