Mixed Signals From Payrolls Data Helps Put The Brakes On Market Momentum

Momentum from the Fed’s dovishness earlier in the week seemed to peter out on Friday, with U.S. stocks ending mixed as market participants digested economic data while earnings season rolled on. 

The Dow Jones Industrial Average ($DJI) posted a 6-week winning streak with a higher close Friday. The S&P 500 (SPX) also gained ground, but the Nasdaq Composite (COMP) finished in the red. Stocks did retreat a bit from their midday highs.

On the plus side, the government’s headline nonfarm payrolls figure came in much higher than expected, showing a rise of 304,000 when a Briefing.com consensus estimate had forecast a gain of 160,000 jobs in January.

Jobs Report Enthusiasm A Bit Tempered

But Wall Street basically shrugged at the number as there may be some factors that could temper enthusiasm about the bumper report. While November’s data were revised upward, the 312,000 reading that had exceeded expectations in December was revised down to 222,000. The figures netted out to show 70,000 fewer jobs than previously reported.

Average hourly earnings, which some analysts see as a key inflation metric, rose 0.1% month over month, arguably indicating pretty tame inflationary pressure. But on an annual basis, average hourly earnings increased by 3.2%, which isn’t insubstantial.

Ahead of the jobs report, weak manufacturing data out of China seemed to underscore worries about global economic growth amid a continuing trade war between the United States and China. But U.S. manufacturing data painted a brighter picture (see more below.) 

Amazon Takes it on the Chin

Amazon.com, Inc.'s AMZN shared dipped substantially after the online retailing giant provided an outlook that seemed to disappoint some investors, even though it beat top- and bottom-line expectations after a bumper holiday season.

Shares retreated after the company talked about spending plans. If you’re having trouble getting your arms around that, you’re not alone. After all, without investing, businesses can wither on the vine. Even so, investors don’t always like to hear about company spending plans. 

One thing to consider watching with Amazon over the next year or two could be its transition from a growth stock to a mature company. As that happens, pressure could increase for the company to not just plow profits back into company spending. 

Energy Rallies

The energy sector was by far the best performer of the day Friday, helped in part by gains in oil prices and corporate earnings. Shares of Exxon Mobil Corporation XOM and Chevron Corporation CVX both gained ground after the companies reported earnings that beat Wall Street estimates. 

Meanwhile, oil prices also rose as the bumper jobs data apparently raised demand among some investors for riskier assets and at the same time boosted sentiment about demand for oil. A stronger economy tends to help increase the use of oil products. 

A report from Baker Hughes also proved bullish, as it showed a decline in the number of U.S. oil rigs, adding to a tightening supply picture after Washington imposed sanctions on the Venezuelan state-owned oil and natural gas company this week.

Factory Orders, Auto Sales In Store Next Week

The coming days look relatively light on economic reports. But it could be interesting to take a look at factory orders on Monday, especially given the concerns surrounding global economic growth and the United States’ role in it. Factory activity can be an important part of overall gross domestic product, and industrial activity in the United States can affect the economies of other nations that export commodities or other goods for use in the domestic manufacturing sector. The market is also scheduled to get readings on car and truck sales for December next week.

Data on 4Q labor costs are due out on Wednesday. Such costs form an important look at inflationary pressures. Labor costs are expected to show a rise of 1.7% for the quarter, according to a Briefing.com consensus. That would be up from Q3’s 0.9% rise.

The inflation data come at a time when the Fed has signaled it can afford to take a break from rate hikes because inflation is muted. But the pendulum could swing the other way if data come in showing inflationary pressures are stronger than previously thought.

Earnings Season Far From Over With Alphabet, Twitter Ahead

Key earnings on tap for the coming days include Alphabet Inc GOOG, Twitter Inc TWTR and Walt Disney Co DIS. 

Alphabet’s results come as technology stocks have been experiencing a bit of a rebound, but it remains to be seen whether the search engine giant will continue that trend. With TWTR, consider paying attention to their numbers on international and domestic users. Meanwhile, DIS could offer a peak into the mind of the consumer at a time when recent data has shown the U.S. consumer has become less confident.

As we continue to move though earnings season, consider paying close attention to retail earnings. One thing to consider watching for is what signals retailers may give on the health of the consumer this year. 

One thing CEOs generally haven’t been talking about this earnings season is capital spending, likely because of uncertainty surrounding the tariff situation with China. That could be concerning if it continues.

Going into Friday, more than 45% of S&P 500 had reported earnings this season. Of those companies, 68.1% have topped analyst expectations, according to FactSet.

Figure 1: VIX on the Decline: Investors appear to be less worried than they were at the end of last year. As stocks have been gaining ground, investor fear, as measured by the Cboe Volatility Index (VIX) has been on the decline. Data Source: CBOE Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Shutdown Complications Continue: While the total number of people employed in nonfarm work in January surpassed expectations, the total unemployment rate also came in higher than forecast. With all the news in recent weeks surrounding the partial government shutdown, you might be wondering how the funding gap affected the jobs report. The answer, in short, is that it’s complicated. For the headline payrolls number, the government counted furloughed federal employees as employed because they worked or received pay (or will) for the pay period including Jan. 12. But federal contractors that didn’t work or receive pay during the shutdown weren’t counted among the employed. Overall, “there were no discernible impacts of the partial federal government shutdown on the estimates of employment, hours, and earnings from the establishment survey,” the Bureau of Labor Statistics said.

However, the government said the partial shutdown contributed to the rise in the unemployment rate (to 4%) and the number of unemployed people (to 6.5 million people). The number of people employed part time for economic reasons, or involuntary part-time workers, rose by around 500,000, perhaps reflecting impact from the shutdown. There was also an increase of federal workers classified as unemployed on temporary layoff as well as a rise in those classified as employed but absent from work. That last group included people affected by the shutdown who should have been classified as unemployed on temporary layoff, according to the government. Had they been correctly classified, the employment rate would have been slightly higher, the government said. (Misclassification can happen when survey respondents misunderstand questions or interviewers record answers incorrectly.)

Construction Jobs Surge: Drilling down into the employment report, one interesting note is that construction employment rose by 52,000 jobs in January, another indicator of strength in the economy. That’s a substantial jump from December’s 28,000 and included gains in residential building construction as well as jobs for residential specialty trade contractors. The gains in residential construction could indicate stronger times for the housing market—which has been a thorn in the side of the economy for some time amid affordability issues for homes—as the spring buying and selling season approaches. “Despite ongoing supply and affordability constraints, the healthy job market and underlying demographic fundamentals both point to gradual purchase growth in the coming months,” said Joel Kan, of the Mortgage Bankers Association, in a press release accompanying the group’s latest mortgage applications report. 

Move Over Payrolls: The jobs report was the big news about the economy on Friday, but a lesser report also brought some encouraging news about the economy. The Institute for Supply Management’s manufacturing index rose unexpectedly in January, providing a counterpoint to some of the doom-and-gloom about the global economic growth situation. The measure was expected to fall from above 54% to 53.6% but ended up coming in three points higher at 56.6%. Anything above 50% represents expansion. Based on the past relationship between the index and the overall economy, the ISM said the latest report indicates the January reading corresponds to a 4% growth in annualized real gross domestic product. According to Briefing.com: “The January increase was driven by solid growth in new orders and production, which suggests the U.S. manufacturing sector is holding up well despite concerns about the pace of global growth.”

Information from TDA 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.