Getting to work. Stocks traded sharply higher on Friday on good employment figures. Friday’s market moves topped off a week of volatility on mixed signals from the US economy giving both bulls and bears some hope.
MY TWO CENTS
- Good is good again, for now. Last week was one heck of a ride for those who watch the markets closely. The first part of the week was dominated by bad economic news about the US manufacturing economy and private employment. Stocks down! Later in the week, an unexpectedly bad economic number on the service economy really jolted the nerves of investors… but not for long. In a flash, markets turned around closing positively on… the bad news. The thesis was that the Fed would have to lower rates further, which is somehow good news – at least for the market. Oh, there were algo trades that happened as well, which accentuated the upward swing. That leads us up to Friday where tensions were high, really high after a week of bad news and confusion about how the market would react to economic data. Thankfully, we got our first bit of good economic news for the week in the monthly employment report. The positive surprise was received positively by the markets sparking a rally. Watching the markets, one could sense a sigh of relief after the report failed to confirm all of the negativity from earlier in the week. We went from bad is bad to bad is good and finally to good is good, all in one week. The take away from all of this is that timing short term moves in the market is difficult, if not impossible. Investors are smart to focus on long term goals making minor adjustments based on longer term trends. See my next point, below.
- What is the longer term trend now? On Friday, the Bureau of Labor Statistics came out with their monthly employment situation. The headline from the release showed the Unemployment Ratecoming in well below expectation at 3.5%. That is low, really low. In fact, it is the lowest in 50 years. Non-Farm Payrollscame in a little soft showing that +136k new jobs were added in September while the same number for the prior month was revised up sharply to +168k from +130k. Those new payrolls are good but not stellar, however in light of the dour economic releases from earlier in the week the news was welcomed by the market. For perspective, the US economy continues to add jobs and more people who want to work are finding jobs. The overall trend is positive although the growth is losing some steam. Now on to wages and inflation. The theory goes that as the job market tightens up wages must rise in order for companies to fill positions. Rising wages should lead to rising prices as demand for goods increases. The difference with this 11-year expansion compared to many in the past is that wages have not risen so fast and retailers have not been able to raise prices, as evidenced by consistently low inflation. Friday’s report showed that Average Hourly Wages did not grow month over month and this week we will get data on consumer prices which may have crept up slightly last month, but still remain low, by historical (and Fed) standards. It is important to note however, that employment, while critical, is usually a lagging indicator, so its trend is a better telltale than the number itself. Numbers that are more forward looking are PMI’s and Consumer Confidence. Those numbers however are typically volatile so watching their trends is the way to go. The trends in those numbers have been weakening over the last three quarters. Next week marks the official start to Q3 earnings season which will be another important data point. Investors will be watching earnings closely with almost 1/2 of S&P500 companies warning of slower earnings growth. For now, the longer term trend still appears to be going up, albeit at a slower pace.
Stocks ended the week higher on good news from the US employment front. The economy continues to generate new jobs and the unemployment rate is the lowest it has been since 1969. Stocks climbed on the news with the S&P500 rising +1.42%, the Dow Jones Industrial Average climbing +1.42%, the Russell 2000 advancing by +0.97%, and the NASDAQ Composite Index trading up by +1.40%. Bonds climbed for a 7th straight session and 10-year treasury yields fell by -1 basis point to 1.52%.
– Minneapolis Fed President Neil Kashkari will speak today.
– Trade talks between the US and China are expected to continue on Thursday when Chinese Vice Premier Liu will visit the US.
– The week ahead will feature Producer Price Index, Consumer Price Index, JOLTS job openings, and the University Of Michigan Sentiment indicator. On Wednesday, the Fed will release the minutes from its last FOMC meeting and with the Fed being such a critical factor in this current market regime, expect it to be closely watched.
– No major earnings releases today but some will start to trickle in later this week as earnings season will officially kick off next week with the banks. Please refer to the attached weekly earning and economics calendars for details.
It was great to meet with clients last week at our Florida locations. I want to remind you that I am always available to meet with you at any of our offices, so please do reach out and set something up.