Labor of love

Labor of love.  Stocks rallied on Friday, rejoicing a stronger than expected jobs number.  Stocks ended the week in a happy place with two thumbs up from the Fed and a still-strong labor market.

 

MY TWO CENTS

 

1.  Work it out!  On Friday, the Department of Labor Statistics released its monthly employment situation report.  It is always closely watched but there are times where it can really pack a punch.  Specifically at what are perceived as turning points for the economy.  Noticed how I used the word “perceived”.  Many economists believe that the current economic expansion being enjoyed by the US is near an end.  It is, after all, the longest economic expansion in history and many argue that, because of that fact alone, the end is nigh.  While that fact is notable, it is still not enough to base an investment thesis on.  That is where employment starts to become an important gauge of economic health.  When looking at a business, we consider employment as a variablecost.  That means it can be adjusted to match the strength in business.  Sad but true, if things get tough for businesses they simply lay off workers to save money, and perhaps the business itself.  It is relatively easy to fire workers compared to getting rid of a building, a fleet of trucks, or a collection of heavy machinery.  It is because of this that these types of things are referred to as fixedcosts.  Back at the start of 2007, just before the last recession, the labor market looked solid but was showing signs of slowing.  When companies have concerns about the future they slow down the pace of hiring.   If things worsen further, growth gives way to slowing and ultimately begins to shrink (AKA layoff).  By July of that same year, Non-Farm Payrolls showed its first negative month since 2003.  Then came the recession and the financial crisis.  At its low point, Non-Farm Payrolls came in at -800,000 jobs for the month.  Soon after, the economy began to recover and the number moved back into positive territory by 2010.  This is why many economists like to follow the labor market closely.  If growth starts to slow we pay close attention.  Last year, the US economy added around +220k jobs per month on average.  This year, the average monthly job creation is only around 167k.  Growth is slowing somewhat, which is why more and more investors are focusing on the monthly number that comes out on the first Friday of each month.  Last Friday’s number was expected to be a weak one.  Non-Farm Payrolls was expected to be only +85k, factoring in the layoffs from the GM strike and a temporary layoff by the Census Bureau.  But that didn’t happen.  The number came in at +128k and last month’s number was revised up to +180k from +136k.  The unemployment rate came in as expected at 3.6%, up slightly from last month’s 3.5%.  The reason?  Greater labor force participation – more folks are looking for jobs, which is positive.  The takeaway is: the economy remains resilient and hiring, though slower than last year, it remains solid.  The labor market shows little sign of breaking down but a close watch is still critical.

 

2.  The fine print.  As mentioned above, Friday’s labor report showed us that hiring is solid.  Earlier in the week we learned that GDP is still growing, albeit at a slower clip.  The consumer remains confident and strong.  Last week, we also got a boost from the Federal Reserve who lowered key interest rates to ensure that economic growth continues.  Last week was also another week of strong earnings releases with companies beating estimates at a better than average rate.  All of these are positive contributors leaving equity indexes on or close to all-time highs.  Looking forward, investors want to know how long the good news will continue, so in the shadow of all the positive headlines, analysts are looking for signs of a slowdown so as not to be caught off guard when things turn around.  One of these signs is corporate earnings.  I said earlier that companies are beating expectations more often than in the past but I have also warned in my notes that expectations are low, making earnings beats easier.  Companies benefited from the 2017 tax legislation which lowered corporate tax rates and allowed them to repatriate large amounts of cash stuck overseas.  A good portion of the additional cash was utilized for dividend increases and stock buybacks.  With those benefits worn off, companies are having to make earnings the old fashioned way and the results are not as good as many might think.  Despite all of the beats, earnings are down roughly -3.5% from last quarter.  On Friday, ISM Manufacturing PMI came in once again below 50 indicating a contraction.  While these are signs that should be heeded, strong labor growth indicated that companies are certainly not concerned about the slow-down in their earnings.

 

THE MARKETS

 

Stocks posted a strong rally on Friday, shrugging off more bad data from manufacturing, instead focusing on strong jobs numbers.  The S&P500 rose by +0.97% to another new high, the Dow Jones Industrial Average climbed by +1.11%, the Russell 2000 jumped by +1.72%, and the NASDAQ Composite Index traded up by +1.13%.  Bonds dipped bringing 10-year treasury yields up by +2 basis points to 1.71%.

 

WHAT’S NXT

 

– Durable Goods Orders are expected to have receded once again by -1.1% for the month.

– Factory Orders are expected to have shrunk by -0.4% compared to last month’s decline of -0.1%.

– San Francisco Fed President Mary Daly will speak today.

– Uber, Sprint, and Under Armour will release earnings before the bell.  After the close we will hear from Shake Shack, Tenet Healthcare, Prudential Financial, Hertz, and Marriott.

– In the week ahead we will get lots more earnings along with services PMI’s, JOLTS Job Openings, and the University of Michigan Sentiment.  Please refer to the attached weekly calendar of economic and earnings releases for details.

daily chartbook 2019-11-04

earnings releases 11_04

econ numbers 11_04