After GDP Surprise, Market Looks Ahead to More Earnings, July Jobs Report

Investors still digesting Friday’s surprisingly sluggish Q2 gross domestic product (GDP) data face another critical week, highlighted by the July employment report.

And the struggling oil market, which was rebounding slightly on Friday but still off 20% from recent highs, continues to raise concern. If Friday’s rebound can’t be maintained, the threat of oil dragging the market down may loom larger.

The employment report Friday is just the cherry on top of a week that’s still loaded with earnings, including reports from major companies, including Pfizer Inc. PFE on Tuesday and Kellogg Company K and MGM Resorts International MGM on Thursday. Other data besides jobs include auto and truck sales on Tuesday and factory orders on Thursday.

To round things out, investors get a look at personal consumption expenditures (PCE) on Tuesday, a data point known to be watched closely by Fed Chair Janet Yellen. And speaking of the Fed, with last week’s meeting out of the way, Fed speakers come back into play this week, and their interpretation of recent data could be in focus.

The big data on Friday wasn’t positive at all, with the Commerce Department’s first estimate for Q2 GDP coming in at 1.2%. That compared with a consensus for 2.6% growth. This wasn’t the government’s final estimate, so it’s important not to read too much into it. And there were some underlying aspects of the report that looked better than the overall number. Consumer spending, for instance, rose 4.2% during Q2, the government said, and outlays on goods rose 6.8%. Personal consumption amounts to about two-thirds of the economy, and, judging from this data, consumers felt confident about spending during the quarter.

Evidently, it was the business world that held back in Q2, as nonresidential fixed investment, a measure of business spending, declined at a 2.2% pace, the third straight quarterly drop. There was also a decrease in private inventory investment, the Commerce Department said. Some of this seemed linked to the energy sector, which has been dogged for months by low oil prices.

Previous quarters also got a haircut. Growth was revised down to 0.9% from 1.4% in the fourth quarter and to 0.8% from 1.1% in the first quarter. That makes Q2 the third quarter in a row of weak growth, and, according to some analysts, brings into question whether the 2% pace of economic growth many had predicted for 2016 can be achieved.

In the wake of the GDP figures, U.S. 10-year Treasury bond prices zoomed up to their highest levels since mid-July Friday, with yields, which move in the opposite direction from prices, falling well below 1.5%. The dollar fell against both the euro and the yen. Even before the GDP data, the yen had made healthy gains vs. the dollar, helped by the Bank of Japan’s decision to leave rates unchanged Friday. Gold prices also jumped more than 1% by midday, possibly helped by thoughts that the weak U.S. GDP would mean less chance of a Fed rate hike in September.

Rate hike expectations, which had been growing before the GDP figure came out, took a sharp downward turn Friday in the futures market, falling to a 12% chance of a September hike. That compared to 24% immediately ahead of GDP. Looking farther out, the futures market still prices in slight chances for a hike later this year, but chances remain well below 50% even into mid-2017. Though it’s much harder to predict what might happen next year, it’s arguable that the Q2 GDP miss could be the final nail in the coffin for a September rate hike.

In a sense, that may put less importance on this Friday’s jobs data, because the thinking may be that even a big number like the 287,000 jobs added in June may not be enough to convince the Fed of strong economic growth when GDP is this sluggish.

In other developments, investors may want to check out European banks’ stress test data, which came out after the U.S. markets closed Friday. Any sense that those banks are struggling could add to worries about the economy in that region.

Even amid all the concern about the U.S. economy, the stock market proved resilient Friday, with the S&P 500 Index (SPX) once again scrambling to a new all-time high at midday. Information technology continued to be the leading sector, spurred on by several robust earnings reports earlier in the week from some of the industry’s stalwarts. Even financials were up, despite the falling odds for higher interest rates. On the whole, earnings season has been pretty strong, with a few notable exceptions, and that seems to be putting a charge into the market. Can this rally continue another week? Stay tuned.

Oil Seen Near Current Levels Over Next Year: The recent glut of oil products, especially gasoline, has raised concerns about demand, with some analysts surmising that the U.S. “driving season” hasn’t been as active as normal. However, a Goldman Sachs report that came out late last week said basically that demand for products like gasoline has remained high all year, but growth in refining capacity and robust refining margins contributed to a gasoline glut, which is weighing on prices. Still, the firm doesn’t expect much of a rebound, pegging oil prices to range between $45 and $50 through mid-2017, with a bias toward the down side. Crude oil futures actually showed a bit of life Friday, rising above unchanged by midday. But profit taking may have been the impetus more than any fundamental factors, analysts said.

Keeping An Eye on the Bigger Picture: When major U.S. stock indices reach all-time highs, as the SPX did on Friday, some investors might get squeamish about buying stocks. The price-to-earnings (P/E) ratio of the SPX is above its historic average, a sign that the market may be a little pricey. But it’s important to remember that the SPX and Dow Jones Industrial Average (DJIA) aren’t the only indices around; just the best known. Other indices and markets aren’t at all-time highs. The Russell 2000, an index of small-cap stocks, was trading at around 1,223 at midday Friday, well below highs of near 1,300 posted over a year ago. Emerging market and international stocks also have a long way to go to reach their own historic high levels, though emerging markets have been on a tear so far this year. That doesn’t mean analysts are advising investors to throw caution to the wind and start buying emerging market and small company stocks, but it does reinforce the potential value of diversification.

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.