Hixon Zuercher Capital Management

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April Jobs Report Shows Slower Pace of Growth – Weekly Update for May 9, 2016

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Image courtesy of FreeDigitalPhotos.net/phasinphoto
Image courtesy of FreeDigitalPhotos.net/phasinphoto

Markets slumped for the third week as global concerns pressured investors again, and domestic data painted a modest picture. For the week, the S&P 500 lost 0.40%, the Dow fell 0.19%, the NASDAQ dropped 0.82%, and the MSCI EAFE fell 3.19%.

April’s job report showed investors that the labor market continues to improve, adding 160,000 jobs last month. However, the gains were far below the consensus estimate of 200,000 new jobs. Though the unemployment rate remained unchanged at 5.0%, one estimate of the underemployment rate—measuring discouraged workers and part-timers who want full-time work—fell to 9.7% from 9.8% in March. That’s good news, because it means that workers who have struggled in the recovery may finally be catching up.

However, it’s not all good news. A separate private industry report found that job cuts surged 35.0% between March and April as firms let go of workers. Over 250,000 pink slips were handed out between January and April, the largest number since early 2009. Though the beleaguered energy sector is driving layoffs, shifting consumer preferences are also causing retail and computer companies to cut jobs.

Further analysis of the job gains also showed that much of the fastest growth in hiring is coming from low-paying industries like retail and hospitality. The lack of high-paying job opportunities is reflected in wage growth numbers. Since 2005, the median weekly wage across all jobs has increased by just $176. Wage gains are even slower in low-paying industries and for workers with less education.

Economists suspect that slow wage growth is contributing to sluggish consumer spending and slower economic growth. When foreign demand drops, economic growth depends more on domestic spending. However, there are signs that growth may be picking up; in April, wages grew 2.5% from the previous year.

Will wages pick up enough this year to drive more purchases of big-ticket items? We’ll have to see.

Looking ahead, it’s unclear whether domestic economic data will drive away global woes. Realistically, we’re likely to see both soft and strong data in the weeks to come that will hopefully push stocks higher again once earnings season is over.

ECONOMIC CALENDAR:

Tuesday: JOLTS

Wednesday: EIA Petroleum Status Report, Treasury Budget

Thursday: Jobless Claims, Import and Export Prices

Friday: Retail Sales, PPI-FD, Business Inventories, Consumer Sentiment

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HEADLINES:

Construction spending grows .03% in March. Spending on commercial and residential construction reached its highest level in eight years after a strong gain in February.

Motor vehicle sales close to record month. After a slow start to the year, April light vehicle sales are expected to grow 5.0%, setting a new monthly high and putting U.S. automakers on track to beat last year’s sales record.

China’s trade slumps. Imports and exports in the world’s second-largest economy contracted sharply in April in the latest sign that weak demand is prolonging China’s slowdown.

March factory orders increase 1.1%. Orders to U.S. manufacturers increased modestly after dropping in February. Economists hope that the dollar’s drop will help the manufacturing sector bounce back.

What Clues Did the First Month of the Year Leave Us? Weekly Update – February 2, 2015

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Image courtesy of FreeDigitalPhotos.net/Cooldesign
Image courtesy of
FreeDigitalPhotos.net/Cooldesign

Markets were driven lower in another volatile week of trading, ending the first month of 2015 in the red. For the week, the S&P 500 lost 2.77%, the Dow fell 2.87%, and the Nasdaq dropped 2.58%.[1]

One of the major contributors to the week’s losses was an unexpected miss in fourth quarter economic growth. The first estimate of Gross Domestic Product (GDP) showed that the economy grew an underwhelming 2.6% in the last three months of 2014. This is a significant drop from the 5.0% growth the economy saw in the third quarter and below economists’ expectations of 2.8%-3.0% growth. However, consumer spending was higher than expected, showing that Americans are still buying. Also, keep in mind that this is just the first estimate of GDP growth. [2] A lot of economic data has yet to be analyzed, and we can hope for upward revisions in the months to come.

Earnings season marches onward and the news is mixed. While the reports we have seen from 228 S&P 500 companies show that earnings are up 5.5% over the same period in 2013, revenues are up just 1.7%.[3] Overall, U.S. companies appear to be struggling with three factors:

  • Falling oil prices, which are seriously affecting energy companies and interrelated businesses.
  • The strength of the U.S. dollar, which is hitting companies that depend on foreign demand hard. A strong dollar makes it more expensive to buy U.S. products.
  • Weak global economic growth. This factor is also pressing down forward guidance from companies, many of which are expecting a tough business environment in 2015.[4]

Even if overall earnings numbers may not look inspiring, there are a lot of individual success stories in each sector. Though volatility is stressful, it can provide opportunities for investors who can be flexible. Part of what we do for our clients is look for those opportunities for growth in every market environment.

Oil prices continued to slide though some analysts believe we may be approaching an oil price floor. One industry insider believes that oil prices could double by the end of 2015 as oil companies respond to the supply glut by slowing down production.[5]

Looking forward, the week ahead is filled with more economic reports, including the January Employment Situation Report, which will hopefully show continual improvement in the labor market. Markets are likely to remain volatile in the days and weeks ahead, but we can hope that positive data might encourage investors to “buy the dip.”

ECONOMIC CALENDAR:

 Monday: Personal Income and Outlays, PMI Manufacturing Index, ISM Mfg Index, Construction Spending

Tuesday: Motor Vehicle Sales, Factory Orders

Wednesday: ADP Employment Report, ISM Non-Mfg. Index, EIA Petroleum Status Report

Thursday: International Trade, Jobless Claims, Productivity and Costs

Friday: Employment Situation

Data as of 1/30/2015 1-Week Since 1/1/15 1-Year 5-Year 10-Year
Standard & Poor’s 500 -2.77% -3.10% 11.19% 17.16% 7.03%
DOW -2.87% -3.69% 8.31% 14.10% 6.46%
NASDAQ -2.58% -2.13% 12.42% 23.17% 12.77%
U.S. Corporate Bond Index 1.59% 2.71% 5.68% 2.71% 1.18%
International -0.28% 0.44% -2.99% 3.37% 1.83%
Data as 1/30/2015 1 mo. 6 mo. 1 yr. 5 yr. 10 yr.
Treasury Yields (CMT) 0.01% 0.07% 0.18% 1.18% 1.68%

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

HEADLINES:

Durable goods fall sharply in December. Orders for long lasting U.S. manufactured goods dropped 3.4% in December after falling 2.1% in November, raising questions about the health of one of the economy’s most important sectors. Though demand for automobiles grew, a core indicator of business investment fell for the fourth straight month.[6]

Consumer sentiment brightens in January. Optimism about better job and wage prospects sent a measure of U.S. consumer sentiment to its highest level since 2004. Hopefully, increased confidence in the economic expansion will translate into higher consumer spending this quarter.[7]

Chinese factory growth slides. China’s manufacturing sector unexpectedly shrank in January to the lowest level since 2012. Since factories often experience a bump just before an important spring holiday, the drop could presage further gloom for China’s economy.[8]

Jobless claims fall to 14-year low. The number of Americans filing new claims for unemployment benefits fell to the lowest level since 2000. Claims had been trending higher in previous reports, so the sudden drop is an indicator that the labor market is returning to its positive trend.[9]

[1] http://goo.gl/RPwDsE

[2] http://www.cnbc.com/id/102383485

[3] http://www.zacks.com/commentary/37601/3-factors-define-q4-earnings-season

[4] http://www.zacks.com/commentary/37601/3-factors-define-q4-earnings-season

[5] http://www.cnbc.com/id/102381893

[6] http://www.usatoday.com/story/money/business/2015/01/27/durable-goods-orders-december/22370639/

[7] http://www.reuters.com/article/2015/01/30/us-usa-economy-sentiment-idUSKBN0L31QI20150130

[8] http://www.reuters.com/article/2015/02/01/us-china-economy-pmi-idUSKBN0L50ZX20150201

[9] http://www.marketwatch.com/story/jobless-claims-drop-to-14-year-low-2015-01-29

Coming Up! Earnings, Elections, & the End of the Year. Weekly Update – September 22, 2014

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ID-100268509
Image courtesy of jscreationzs at FreeDigitalPhotos.net

Markets regained steam last week, pushed higher by a reassuring Federal Reserve meeting and a referendum on Scottish independence. For the week, the S&P 500 gained 1.25%, the Dow grew 1.72%, reaching a new record, and the Nasdaq rose 0.27%.[1. http://goo.gl/7e8iCs, http://www.usatoday.com/story/money/markets/2014/09/18/stocks-thursday/15819291/]

 

As was generally expected, the Federal Reserve voted to continue to taper its quantitative easing programs by another $10 billion per month.[2. http://www.cnbc.com/id/102009413] Digging a little deeper, meeting notes suggest that though the Fed believes the economy is still growing at a moderate pace, economists are still concerned about meager labor participation and growing income inequality. The official statement of the Fed’s meeting shed little light on the timeline for interest rate changes, but Dallas Fed President Richard Fisher stated that the Fed should start raising rates in spring 2015, not summer, as many analysts have predicted.[3. http://www.reuters.com/article/2014/09/19/us-usa-fed-fisher-idUSKBN0HE1NW20140919] It’s too soon to know how markets will react to a sooner-than-expected interest rate increase, especially since economic conditions between now and then may change.

 

The U.S. dollar has been on a tear over the last couple of months, making this the longest winning streak since 1973, and the return of a strong dollar has its share of winners and losers.[4. http://www.reuters.com/article/2014/09/19/usa-stocks-weekahead-idUSL1N0RK1W120140919] A rising dollar helps fight inflation by making each dollar buy more in goods and services; it also makes it cheaper for Americans to buy imported goods. Since consumer spending makes up about 70% of economic activity, when consumers pocket extra money, it’s generally a win for the economy. On the other hand, a stronger dollar is hard on exporters of U.S. goods, and multinationals who depend on foreign demand are being hit with a one-two punch of stagnant demand from major trading partners in Europe and Asia plus a rising dollar, which further cuts into their sales.

 

So, is a rising dollar ultimately good for the U.S. economy? In the short run, it’ll probably be a net positive, since consumers are benefiting and will be able to spend more money. The long-term effects won’t be known for some time; but, generally speaking, as long as currency movements remain stable, financial markets should be able to adapt.[5. http://www.reuters.com/article/2014/09/19/usa-stocks-weekahead-idUSL1N0RK1W120140919]

 

The week ahead is packed with speeches by Fed insiders, which analysts will be mining for additional details after the Fed’s official statement last week. With the end of the quarter upon us, investors are also starting to turn their attention to earnings, mid-term elections, and positioning their portfolios for the end of the year. Could we still see a correction? Absolutely. While the equity environment is looking healthy and the economy is doing well, a deteriorating economic situation in Europe and China or geopolitical issues in Ukraine or the Middle East could definitely throw a wrench into the works.

 

 

ECONOMIC CALENDAR:

 

Monday: Existing Home Sales

Tuesday: PMI Manufacturing Index Flash

Wednesday: New Home Sales, EIA Petroleum Status Report

Thursday: Durable Goods Orders, Jobless Claims

Friday: GDP, Consumer Sentiment

 

Data as of 9/19/2014 1-Week Since 1/1/14 1-Year 5-Year 10-Year
Standard & Poor’s 500 1.25% 8.77% 16.72% 17.64% 7.81%
DOW 1.72% 4.24% 10.51% 15.19% 6.80%
NASDAQ 0.27% 9.65% 20.86% 22.95% 13.98%
U.S. Corporate Bond Index 0.17% 2.50% 3.51% 1.98% 0.83%
International 0.02% -0.76% 3.07% 3.88% 3.77%
Data as 9/19/2014 1 mo. 6 mo. 1 yr. 5 yr. 10 yr.
Treasury Yields (CMT) 0.01% 0.04% 0.11% 1.83% 2.59%

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

HEADLINES:

Factory activity falls in September. A key Federal Reserve indicator of manufacturing in the key mid-Atlantic region decelerated this month. The survey, covering factories in Delaware, eastern Pennsylvania, and southern New Jersey, is often seen as a bellwether for national trends.[6. http://www.cnbc.com/id/102012810]

Jobless claims fall to lowest level since July. Weekly claims for new unemployment benefits unexpectedly fell to 280,000, putting the labor market back on trend for sustained improvement.[7. http://www.reuters.com/article/2014/09/18/us-usa-economy-unemployment-idUSKBN0HD1FR20140918]

Scotland votes “no” on independence. The E.U. weathered one of its first serious independence crises when a referendum on Scottish independence was defeated. While the vote was close and the issue may arise again, Scotland (and its valuable North Sea oilfields) will remain part of the U.K. and EU for now.[8. http://www.nbcnews.com/storyline/scotland-independence-vote/ten-things-know-about-scotlands-independence-referendum-n203511]

Housing starts to drop dramatically. Groundbreaking activity on new homes dropped 14.4% in August, led by a slump in multifamily apartments and condos. As Americans have shied away from homeownership in favor of renting, builders have started work on more rental units, a more volatile category of housing growth.[9. http://www.bloomberg.com/news/2014-09-18/housing-starts-drop-more-than-forecast-in-uneven-u-s-recovery.html]

Markets Slump As Investors Wait for Earnings Weekly Update – July 14, 2014

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Image courtesy of FreeDigitalPhotos.net/renjith krishnan
Image courtesy of FreeDigitalPhotos.net/renjith krishnan

Stocks checked their advance last week as investors weighed earnings reports and waited for more news. Worries at one of Portugal’s largest banks also contributed to mid-week losses. For the week, the S&P 500 lost 0.90%, the Dow fell 0.73%, and the Nasdaq dropped 1.57%.[1. http://goo.gl/JrfxGp]

Markets took a dive in the middle of the week on news that one of Portugal’s largest banks may be in trouble. Investor concerns about a possible domino effect in the EU’s financial system were soothed by statements from European Central Bank officials, who claimed that only one bank was affected by financial irregularities.[2. http://www.reuters.com/article/2014/07/10/us-markets-stocks-idUSKBN0FF18H20140710] However, investors still used the opportunity to take some profits off the table.

Expectations about second quarter performance also set the tone for markets last week. While investors were willing to shrug off negative news in the first quarter because of the poor weather, their optimism has raised expectations for Q2 earnings and economic performance. So far, we haven’t seen enough data to draw any conclusions, but total Q2 earnings for S&P 500 firms are expected to be up about 3.00%.[3. http://www.zacks.com/commentary/33310/its-all-about-q3-guidance ]

Economic news was scarce last week, but weekly jobless claims fell to one of the lowest levels since the last recession. While weekly numbers are always volatile, the four-week moving average also dropped to the second-lowest reading since August 2007.[4. http://www.cnbc.com/id/101825767] All told, it was a pretty good week for the labor market.

Earnings season kicks into high gear this week and reports will likely affect markets as investors discover whether their high hopes for second quarter performance bear out. Federal Reserve Chair Janet Yellen will also deliver her second semi-annual remarks on monetary policy before the House and Senate.[5. http://www.bloomberg.com/news/2014-07-10/yellen-testimony-china-gdp-gm-jpmorgan-week-ahead-july-12-19.html] Though we don’t expect any surprises, analysts will be digging into her comments for hints about when the Fed might raise interest rates.

ECONOMIC CALENDAR:

 

Tuesday: Retail Sales, Empire State Mfg. Survey, Import and Export Prices, Business Inventories, Janet Yellen Speaks 10:00 AM ET

Wednesday: PPI-FD, Treasury International Capital, Industrial Production, Housing Market Index, Janet Yellen Speaks 10:00 AM ET, EIA Petroleum Status Report, Beige Book

Thursday: Housing Starts, Jobless Claims, Philadelphia Fed Survey

Friday: Consumer Sentiment

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HEADLINES:

Wholesale inventories jump in May. Business inventories surged 0.50% from April as firms stocked up on autos, machinery, and lumber. Inventories are a key component of GDP calculations and gains in this area indicate that businesses could be restocking to cope with rising demand.[6. http://www.cnbc.com/id/101793184]

Percentage of uninsured Americans drops. A recent Gallup poll shows that only 13.40% of Americans lack health insurance, a significant drop from mid-2013, when 18.00% of Americans were uninsured. This could be good news for the healthcare sector, which might see increased demand from the newly insured.[7. http://www.cnbc.com/id/101827446]

Retail sector in a funk? Several retail chains have blamed weak earnings on sluggish demand, indicating that lower- and middle-income consumers may not be reaping the benefits of a growing economy.[8. http://www.cnbc.com/id/101830218 ]

U.S. refineries struggle to keep up with oil production boom. Rapid increases in oil extraction means America is in the upper strata of global oil producers. However, limited refinery capacity is keeping domestic gas prices high.[9. http://www.cnbc.com/id/101823507]

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