Resilient Markets Face Day of Reckoning Friday: Was May Jobs Data Start of Trend?

The waiting game is on to see if last month’s shockingly weak jobs number was an anomaly or the start of a trend.

Early Friday, investors will get a look at June job growth, following up the weak May headline number of just 38,000 jobs created. Estimates ahead of the report call for much stronger results.

The markets got a bit of a preview early Thursday, with employment in the private sector rising by 172,000 in June, according to ADP. That beat consensus of 159,000. The ADP number was pretty good, and certainly wasn’t a negative shock like the May government data. In looking at Friday’s government data, don’t just focus on the June number. Check and see if the government revises that May number upward. It seems possible, especially considering that the Verizon Communications Inc VZ strike ended right as the May number came out.

Another thing to keep watching is interest rates, as the U.S. 10-year Treasury yield fell to a new record low down near 1.32% on Wednesday before recovering somewhat to around 1.39% early Thursday. There was some recovery in the stock market late Wednesday, but that doesn’t necessarily change the overall picture, in which a large number of investors have embraced safety after last month’s Brexit vote. This pounding of yields is something many are concerned about, and it seems it should have worked its way through the system by now, nearly two weeks after Brexit shocked the markets. But it hasn’t.

This safety play isn’t just a bond game. Certain segments of the stock market, especially dividend stocks, are benefiting as well. The consumer staples sector, a traditional safety area, is up more than 3.4% over the last month, compared to hardly any rise in the S&P 500 Index (SPX). The utilities sector is up more than 6% over the last month. Meanwhile, the information technology and financial sectors lag the SPX. Keep watching the financials, which have been beaten down by bond strength. The financial sector needs to get some momentum if the overall market is to have a true rally.

Oil prices have bounced back a bit from weakness early this week, and it’s worth watching to see if that gives the stock market a boost.

Meanwhile, volatility has really eased, with VIX futures falling another 1.7% early Thursday to 15.31. Though the stock market has gone down and up since Brexit, VIX has basically moved in just one direction since then, and that’s lower. Compare today’s VIX to where it was right after Brexit, when it hit 25. A falling VIX points to less fear in the market.

On the earnings front, PepsiCo, Inc. PEP might put some fizz into the trading day, reporting Q2 net earnings of $1.38 a share, compared with analysts’ estimates for $1.29. Revenue was in line with expectations. The company, which sells a number of food products along with its famous soda, also raised its outlook, and said Q2 results got a boost from its snack foods units. However, PEP took a hit from weak foreign currencies. Looking ahead to the rest of earnings season, this could be part of a theme. Will dollar strength temper earnings for companies with large overseas operations? Time will tell.

One thing that continues to amaze is the overall market’s resilience in the face of so many uncertainties. Despite all the negativity, the S&P 500 Index (SPX) finished Wednesday just a hair under 2100, and only about 30 points from the all-time high posted in May 2015. The market appears much more resilient than many thought it could be.

Americans’ Response to Economic Woes? Fill Her Up! Concerns about the economy don’t seem to be affecting U.S. oil demand. Crude inventories fell by 6.7 million barrels in the week ended July 1, compared with expectations for a decrease of 2.3 million barrels, the American Petroleum Institute said Wednesday. The official U.S. government data comes out at 11 a.m. ET today. Though U.S. supplies have fallen the last few weeks, the U.S. now has the most recoverable oil of any producer, Rystad Energy said in a recent report, with 264 billion barrels of reserves. That’s more than Russia (256 billion barrels) or Saudi Arabia (212 billion barrels). The world has a total of about 2.1 trillion barrels of oil remaining, enough for 70 years of use at current rates. Somewhat ominously, Rystad said, “This data confirms that there is a relatively limited amount of recoverable oil left on the planet. With the global car-park possibly doubling from 1 billion to 2 billion cars over the next 30 years, it becomes very clear that oil alone cannot satisfy the growing need for individual transport.” Does this mean we’re headed for “peak oil?” Not necessarily. These estimates have a way of changing over time. For instance, in 2004, OPEC pegged world oil reserves at 1.1 trillion barrels, and now, according to Rystad, that level has nearly doubled.

Prudence Rules at Fed: The Fed’s June meeting minutes released Wednesday showed the Fed deciding it would be prudent to wait until after Brexit and more data to decide on rates. One data point worth watching, however, continues to be core personal consumption expenditures (PCE). Deep in the minutes released Wednesday, the Fed reported that one member noted that the annual rate of increase in core PCE inflation in the first quarter had exceeded 2 percent, which is the Fed’s inflation target. However, several others continued to see downside risks to inflation, citing the decline in inflation expectations and the risk of adverse shocks to U.S. economic activity from developments abroad. Core PCE for May was 1.6% year-over-year, so it’s now below the Fed’s target. Nevertheless, PCE remains worth watching, because the Fed seems to be.

Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.

Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2016 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.