Jobs, Jobs, Jobs
The stock market reacted positively to Friday's strong jobs report, especially growth-sensitive Nasdaq, even though the bond market began to price-in earlier interest rate hikes. The report showed that more than half a million net new jobs were created in the first quarter. Stocks supposedly fear rate hikes and value companies that scrimp on employees. And they've already priced in all-time record corporate profits. So why the celebration?</br></br>The explanation for the stock rally after the jobs report is twofold. Despite its many flaws, the jobs report has become a key election issue -- the stronger the report, the better the chances for President Bush's re-election -- and this election will likely determine the taxation of equities, high or low, for years to come.</br></br>The stock-market logic goes like this: The 2003 tax cut lowered taxes on stocks, but only through 2008. The extension of the tax cuts is critical to the value of equities, which have added $3 trillion in market capitalization since the 2003 cuts were enacted. Because the candidates have been quite clear on their stance toward extending the key growth provisions of the 2003 tax cut, a Bush victory and Republican gains in the Senate likely mean lower taxes on capital, more capital and higher stock prices -- and the reverse if John Kerry wins.</br></br>The second reason equities liked the strong jobs report is because it might finally break through the risk aversion still dominating corporate America's decision-making. Given the trauma of the 2000-2001 deflation, the stock market crash, the intense regulatory backlash and 9/11, established businesses like those surveyed in Friday's jobs report have been unusually cautious about the outlook. Though new surveys show rising business confidence, companies have preferred cash over inventory, investments and employees.</br></br>In the aggregate, businesses normally invest more than their cash flow, adding debt as they grow. The last year has seen a remarkable degree of corporate caution, with growth in new investment falling well short of the growth in cash flow for the first time on record. This also shows up in the record-low level of inventories relative to sales in recent months, and in the reluctance of established businesses to hire when bad memories of the 2000-2001 downsizing are still fresh.