Major Moves

After getting the shocking news last month that the U.S. economy had created only 33,000 new jobs in February, investors have been optimistically nervous all week as they have waited for the March Nonfarm Payrolls number from the Bureau of Labor Statistics (BLS).

Investors were optimistic because they have seen multiple instances since the "Great Recession" where jobs numbers have surprised to the downside one month only to rebound the following month. They were nervous because every trend must come to an end at some point, and what if this month was that moment when the month after a disappointing number wasn't followed by a strong number?

Luckily, investor optimism was rewarded this morning as the BLS announced that the U.S. economy created 196,000 new jobs in March – 24,000 above the consensus estimate of 172,000. In addition to the Nonfarm Payrolls number, the BLS also announced that the unemployment rate remained unchanged at 3.8%, and average hourly earnings increased by only 0.1%.

This was a surprisingly low average hourly increase – the consensus estimate was looking for a 0.3% gain – but it fits right in line with the narrative the Federal Open Market Committee (FOMC) has been outlining recently regarding low levels of inflationary pressure.

When wages rise quickly, it puts upward pressure on inflation because consumers have more money in their pockets to spend on goods and services. Conversely, when wages rise slowly, it reduces the upward pressure on inflation.

Investors responded to this good news by buying stocks.

Chart showing Total Nonfarm Payrolls
Federal Reserve Economic Data

S&P 500

The S&P 500 capped off a stellar week by closing at 2,892.74, its highest close since Oct. 4, 2018. In fact, the index closed higher than the previous day every day this week.

Don't get confused by the two red candlesticks on the chart this week – one on Tuesday and one on Wednesday. The color is not determined by comparing the close price for the day with the close price of the previous day.

Instead, the color of each candlestick is determined by whether the close price for that day is higher or lower than the open price of the same day. When the close price is higher than the open, the candlestick is green. Conversely, when the close price is lower than the open price, the candlestick is red.

Bullish economic news, anticipation that the United States and China are close to a trade deal and an optimistic outlook for the upcoming earnings season all seem to be contributing to the S&P 500's recent success. Unless earnings season is a complete bust, it looks like the bullish trend is going to continue.

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Performance of the S&P 500 Index

Risk Indicators – VIX

You could see investor excitement on display not only in the performance of the S&P 500 today but also in the CBOE Volatility Index (VIX). The VIX dropped to a low of 12.2 today, its lowest level since Oct. 5, 2018.

The VIX wasn't able to close at its intra-day low – bouncing up ever so slightly to close at 12.8, its lowest closing level since Oct. 3, 2018 – but the drop is a strong signal that investors are not worried about any sudden turnarounds on Wall Street in the near term. This is an especially good sign heading into earnings season.

Earnings season is typically a time of increased volatility because there are so many unknowns heading into a company's earnings announcement. Did revenues and earnings rise? Was management able to keep expenses under control? What is the outlook for the company in the coming year?

Investors tend to respond to these unknowns by increasing implied (i.e. anticipated) volatility levels ahead of earnings announcements and then decreasing them after earnings announcements, once all of the questions have been answered.

Seeing the VIX dropping to these low levels with the Q1 2019 earnings season right around the corner illustrates just how bullish Wall Street is at the moment.

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Performance of the CBOE Volatility Index (VIX)

Bottom Line – More Jobs Equals More Spending

The Nonfarm Payrolls number is one of the most important economic announcements of the month. Investors watch this number closely because they know that the U.S. economy is driven by consumers, and the more consumers there are that have jobs, the more they are likely going to spend in the economy.

Seeing a strong rebound in the number of jobs created in March is a good sign going into the Q1 2019 earnings season because those consumers who got new jobs, coupled with those consumers who already had jobs, were likely contributing to revenue growth in corporate America last quarter. And if revenues were rising, earnings per share (EPS) were likely also growing.

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