Ugly. That was my first reaction to today's non-farm payrolls report, and the market obviously agrees, with the S&P down in morning trading and Nasdaq falling harder. While December and January's payroll gains were revised higher in today's report, there is just no way to spin positively a month with only 20,000 net payroll additions while still producing 3.4% annualized wage growth. So, I won't try to.
TheStreet.com founder Jim Cramer often says the tone for the market's performance in any given month is set by the jobs number, and this week's action seems to have reversed the market's trend from the first eight weeks of the year, the strongest start to a year in two decades.
Please don't be myopic, either. The Shanghai Composite has been hammered in today's trading, falling 4.4%, and that should be a sign that all is not well with the economy of the Middle Kingdom. This morning saw the release of February car sales data for China, and as someone who spent years of his life analyzing monthly auto sales, I can say they were just dreadful. The 18.5% year-on-year decline in auto sales in February shows that China's consumer continues to practice extreme caution in the face of geopolitical uncertainty, and that change in behavior will have negative ramifications across the scope Asian economies.
The drop in the Shanghai Composite has to be framed in the context of a huge jump from the 2,405 level in early January to above 3,100 this week, however. Similarly, this brutal week for the bulls in the U.S. still will see the S&P 500 finish trading more than 15% above its Christmas Eve level of 2,450.
So, the two driving factors of 2019's rally -- a dovish Fed and hopes for a U.S.-China accord on trade -- have to be constantly monitored. One easy way to do that is via the U.S. Treasury market. The yield curve, frankly, looks horrible. In fact the curve has been partially inverted throughout 2019 and that has kept me from pouring money into U.S. stocks to chase this rally.
At 2.63%, down 23 basis points from its level one year ago, the yield on the benchmark 10-year U.S. Treasury note is indicating an economy that is slowing, not accelerating. The inversion in what traders refer to as the "belly" of the Treasury yield curve -- the 12-month treasury note is yielding 2.51% today, while the 5-year note is yielding 2.43% -- also indicates a domestic economy with a material change of heading into recession.
Again, myopia should be avoided. A quick check of global Treasury rates shows the German 10-year Bund is flirting with negative territory again (yielding 0.07% as of this writing,) the Japanese JGB is back in negative territory and for a country that is -- if you believe the press clippings -- about to enter an Armageddon-like Brexit, the the 1.19% yield on the U.K.'s 10-year Gilt seems awfully low.
So, as I mentioned in my RM column yesterday, this is not the time to be investing in lower-quality stocks on the hopes of outperformance. Stick with high-quality names and realize that your portfolio value as of the end of February was probably a near-term peak.
For the short-term traders out there, look to play this sweeping pullback in interest rates by increasing exposure to the interest sensitive REIT and utility sectors, and layering in some preferred stocks and high-quality corporate bonds, as well. In a declining market, yield will be your friend. Owing to the benefit from their higher-than-average yields, Utilities (total return of +4.1% in 2018) and Real Estate (-2.2% total return) strongly outperformed the S&P 500's -4.4% total return in 2018. If we are entering into a repeat of last year's macro scenario, those sectors should once again reign for the balance of 2019.