Friday's disappointing U.S. jobs report is the latest crack in a shaky global recovery--and a test of will for investors looking to clamber aboard a rally that has pushed stock benchmarks to new highs.
For weeks, investors had been growing confident about global economic prospects and looking for a pullback to pile into the stock rally. But with just 88,000 new jobs added to the U.S. economy in March, investors are, instead, facing a new debate over whether the global recovery can power through a season that has proved notoriously volatile in the past four years.
Even as the Federal Reserve and other central banks continue to support the economic recovery, signs of traction remain elusive. In the past week, reports on manufacturing in the U.S. and the euro zone have disappointed investors, and preliminary readings on the U.S. labor market had been flashing warning signals coming into Friday's session.
In early trading Friday, the Dow Jones Industrial Average was down as many as 169 points. Demand for the perceived safety of U.S. Treasury securities shot up, pushing the yield on the benchmark 10-year note down to 1.689% in the minutes after the report--the lowest intraday level so far this year, according to Tradeweb. Just moments before the jobs number hit the tape, the 10-year note's yield was around 1.75%. (Prices and yields move in opposite directions.)
The CBOE Market Volatility Index--the "fear gauge" known as the VIX--jumped 9%, in a reflection of the heightened worries about the economy.
"There have been several things both domestically and globally in recent weeks that markets just seemed to ignore. This might be a day when investors start opening their eyes to these risks," said Lawrence Creatura, portfolio manager at Federated Investors, which oversees $380 billion in assets.
Federated Investors had already this week been shifting its investments to more defensive positions, following the downbeat manufacturing and employment reports. Federated sold stocks that were rising and was more aggressive in trimming positions, Mr. Creatura said.
Now, with new evidence of a slowdown in the recovery, Mr. Creatura said his firm was holding off on making any new stock investments. "The jobs number was lower than even the worst of the worst forecasts," he said.
For Jim Russell, senior equity strategist at U.S. Bank Wealth Management, which manages about $130 billion, the jobs number is the latest evidence that the economic recovery is slowing.
"We have detected over the past two weeks a cadence of macro numbers that is noticeably weaker than what most people would have thought just a month ago," said Mr. Russell, who is considering trimming exposure to cyclical stocks. "A month ago, a lot of shops were taking up their estimates on GDP [gross domestic product] growth. Today's number really blows a chilly wind through that view."
In a sign of investors' dual focus on the recovery and the central banks that have helped to keep markets buoyant, gold futures jumped as much as 1.5% after the jobs report, reflecting expectations that the weakness would keep the Fed's stimulus in place for longer.
Gold prices tend to rise amid expectations of Fed support and, in previous weeks, gold traders had been shedding holdings of the precious metal. Friday's report, though, "takes the wind out of people who are talking about the end of [the Fed's easing program]," said Charles Nedoss, a senior market strategist with Kingsview Financial.
Mr. Russell, of U.S. Bank Wealth Management, said that before Friday's downbeat reading he thought the Fed might begin to pare back the pace of its $85 billion a month asset-purchase program as soon as the third quarter of this year. But that belief is far from a surefire thing now, he said.
"The Fed is specifically targeting unemployment trends, and we feel that this type of number perhaps lengthens, though not intensifies, the commitment that they've made," Mr. Russell said. So far, his firm has maintained its equity allocations, but he is considering paring back exposure to stocks in growth-sensitive areas such as industrials in favor of defensive sectors.
On the foreign-exchange markets, the euro shot up against the dollar, trading above $1.30 for the first time in nearly two weeks as investors' faith in the U.S. recovery slipped. The ripples could be felt in currency markets that are reliant on the U.S. for growth.
The Mexican peso, which tends to react strongly to U.S. data, given Mexico's strong economic ties with its northern neighbor, dove to a session low against the dollar. That could be a sign of things to come among other emerging-market currencies that are looking to the U.S. as a key growth engine this year.
"It's going to be difficult for [emerging markets] to continue rallying if there's slowing growth in the U.S.," said Win Thin, emerging-market currency strategist at Brown Brothers Harriman in New York.
While some investors were bracing for choppier U.S. growth ahead, others were staying the course, betting that the latest headwinds will eventually pass--and shake out traders and investors with less conviction in the global recovery.
"This is going to stimulate a debate around whether we are going to have a soft patch and, ultimately, that debate is healthy," said Charles Kantor, portfolio manager and managing director at Neuberger Berman. "It'll be interesting to see whether the cash that's sitting there looking to get invested uses this as a reason to tiptoe back into the market, or if it's another reason to say "It's over" again," he said.
Mr. Kantor himself has no plans to change his views. "Speak to me at the end of the year, and my sense is that we'll be higher than we are now," he says. "The economic data this week has definitely been weak, and that's fine. Things don't go in a straight line. It'll shake some of the weak money out and that's healthy."
Michael Strauss, chief investment strategist at Commonfund, in Wilton, Conn., said he was willing to shrug off the report as an anomaly in an otherwise-improving economic picture. He pointed to February's report, which was revised higher to 268,000 new jobs--the best monthly report in a year.
"You have to take the February number with a grain of salt and the March number with a grain of salt--put the two together and divide by two, and you wouldn't have too much excitement," Mr. Strauss said. "The perma-bears are going to have a field day over this report but, if you go back and analyze the data, it's not disturbing as the 88,000 [figure] suggests."
Kaitlyn Kiernan, Chris Dieterich, Erin McCarthy, Tatyana Shumsky and Ira Iosebashvilli contributed to this article.
Write to Jonathan Cheng at jonathan.cheng@wsj.com.
For weeks, investors had been growing confident about global economic prospects and looking for a pullback to pile into the stock rally. But with just 88,000 new jobs added to the U.S. economy in March, investors are, instead, facing a new debate over whether the global recovery can power through a season that has proved notoriously volatile in the past four years.
Even as the Federal Reserve and other central banks continue to support the economic recovery, signs of traction remain elusive. In the past week, reports on manufacturing in the U.S. and the euro zone have disappointed investors, and preliminary readings on the U.S. labor market had been flashing warning signals coming into Friday's session.
In early trading Friday, the Dow Jones Industrial Average was down as many as 169 points. Demand for the perceived safety of U.S. Treasury securities shot up, pushing the yield on the benchmark 10-year note down to 1.689% in the minutes after the report--the lowest intraday level so far this year, according to Tradeweb. Just moments before the jobs number hit the tape, the 10-year note's yield was around 1.75%. (Prices and yields move in opposite directions.)
The CBOE Market Volatility Index--the "fear gauge" known as the VIX--jumped 9%, in a reflection of the heightened worries about the economy.
"There have been several things both domestically and globally in recent weeks that markets just seemed to ignore. This might be a day when investors start opening their eyes to these risks," said Lawrence Creatura, portfolio manager at Federated Investors, which oversees $380 billion in assets.
Federated Investors had already this week been shifting its investments to more defensive positions, following the downbeat manufacturing and employment reports. Federated sold stocks that were rising and was more aggressive in trimming positions, Mr. Creatura said.
Now, with new evidence of a slowdown in the recovery, Mr. Creatura said his firm was holding off on making any new stock investments. "The jobs number was lower than even the worst of the worst forecasts," he said.
For Jim Russell, senior equity strategist at U.S. Bank Wealth Management, which manages about $130 billion, the jobs number is the latest evidence that the economic recovery is slowing.
"We have detected over the past two weeks a cadence of macro numbers that is noticeably weaker than what most people would have thought just a month ago," said Mr. Russell, who is considering trimming exposure to cyclical stocks. "A month ago, a lot of shops were taking up their estimates on GDP [gross domestic product] growth. Today's number really blows a chilly wind through that view."
In a sign of investors' dual focus on the recovery and the central banks that have helped to keep markets buoyant, gold futures jumped as much as 1.5% after the jobs report, reflecting expectations that the weakness would keep the Fed's stimulus in place for longer.
Gold prices tend to rise amid expectations of Fed support and, in previous weeks, gold traders had been shedding holdings of the precious metal. Friday's report, though, "takes the wind out of people who are talking about the end of [the Fed's easing program]," said Charles Nedoss, a senior market strategist with Kingsview Financial.
Mr. Russell, of U.S. Bank Wealth Management, said that before Friday's downbeat reading he thought the Fed might begin to pare back the pace of its $85 billion a month asset-purchase program as soon as the third quarter of this year. But that belief is far from a surefire thing now, he said.
"The Fed is specifically targeting unemployment trends, and we feel that this type of number perhaps lengthens, though not intensifies, the commitment that they've made," Mr. Russell said. So far, his firm has maintained its equity allocations, but he is considering paring back exposure to stocks in growth-sensitive areas such as industrials in favor of defensive sectors.
On the foreign-exchange markets, the euro shot up against the dollar, trading above $1.30 for the first time in nearly two weeks as investors' faith in the U.S. recovery slipped. The ripples could be felt in currency markets that are reliant on the U.S. for growth.
The Mexican peso, which tends to react strongly to U.S. data, given Mexico's strong economic ties with its northern neighbor, dove to a session low against the dollar. That could be a sign of things to come among other emerging-market currencies that are looking to the U.S. as a key growth engine this year.
"It's going to be difficult for [emerging markets] to continue rallying if there's slowing growth in the U.S.," said Win Thin, emerging-market currency strategist at Brown Brothers Harriman in New York.
While some investors were bracing for choppier U.S. growth ahead, others were staying the course, betting that the latest headwinds will eventually pass--and shake out traders and investors with less conviction in the global recovery.
"This is going to stimulate a debate around whether we are going to have a soft patch and, ultimately, that debate is healthy," said Charles Kantor, portfolio manager and managing director at Neuberger Berman. "It'll be interesting to see whether the cash that's sitting there looking to get invested uses this as a reason to tiptoe back into the market, or if it's another reason to say "It's over" again," he said.
Mr. Kantor himself has no plans to change his views. "Speak to me at the end of the year, and my sense is that we'll be higher than we are now," he says. "The economic data this week has definitely been weak, and that's fine. Things don't go in a straight line. It'll shake some of the weak money out and that's healthy."
Michael Strauss, chief investment strategist at Commonfund, in Wilton, Conn., said he was willing to shrug off the report as an anomaly in an otherwise-improving economic picture. He pointed to February's report, which was revised higher to 268,000 new jobs--the best monthly report in a year.
"You have to take the February number with a grain of salt and the March number with a grain of salt--put the two together and divide by two, and you wouldn't have too much excitement," Mr. Strauss said. "The perma-bears are going to have a field day over this report but, if you go back and analyze the data, it's not disturbing as the 88,000 [figure] suggests."
Kaitlyn Kiernan, Chris Dieterich, Erin McCarthy, Tatyana Shumsky and Ira Iosebashvilli contributed to this article.
Write to Jonathan Cheng at jonathan.cheng@wsj.com.
