Stocks Have A Great Week Despite Subpar Labor Report

The main reason investors have been cautious heading into this week was because of the potential for a North Korean flare up. It turned out that the market decided to ignore the North Korean risk as the last week before Labor Day, when most people go on vacation, was fantastic. The Nasdaq was up 2.75% which was the best weekly gain since December 2016. This was led by Apple which was up 2.62% this week. It now has an $847 billion market cap. The event which will unveil the new iPhone will be September 12th, meaning your window to sell it if you’re a short-term trader is closing.

Friday was the beginning of September which usually means bad results for stocks, but that is caused by people coming back from vacation and realizing stocks rallied too much on low volume. That realization comes after Labor Day, so this Friday didn’t count. Gold was up 2.6% for the week which was the best week since April 2016. Usually September is great for gold since there’s increased stock volatility and because of the Indian wedding season. The S&P 500 was up 1.5% which was the best week in 4 months.

The table below breaks down the S&P 500’s performance by sector. Only the energy sector is down year to date. Healthcare and information technology hit their all-time closing high which is make sense since they were the two sectors which had the highest rate of firms beating their earnings estimates. Even though stocks sold off after they initially beat earnings estimates this past earning season, it appears the winners are now getting their due. Financials are below their 50-day moving average and only up 7.0% year to date partially because the Fed has been dovish after the second rate hike this year. Their net interest margins won’t be expanding anytime soon. The expectations for rate hikes in the next 12-months have come down dramatically, as zero hikes are being priced in.

The S&P 500 was up 0.20% on Friday despite the bad labor report which I will get to in a moment. The VIX was down 4.34% to 10.13. As you can see from the chart below, the 12-month rolling volatility is near its all-time low. There’s no rule that says volatility must increase after being low for a while, so don’t think this means a correction is coming. There would need to be a negative catalyst for that to happen.

Poor Labor Report

The job cuts indicator was right and I was wrong as the labor report for August was weak even though there was no impact from hurricane Harvey. As you can see from the chart below, the headline report was 156,000 jobs created which was below the consensus estimate for 180,000. To make matters worse, the previous two reports were revised down by 41,000 jobs. This puts the possibility of a rate hike this year off the table which may be why stocks rallied. The CME website forecasts a 40.8% chance of a hike by December which isn’t high enough for there to be one. If the next three reports are as weak as this one, there’s no chance of a rate hike. The next report will be a wash because it will be impacted by Harvey, meaning we might need to wait 60 days to see in the weakness continues.

The number of employed Americans fell by 74,000 to 153,439,000. The annualized employment level increased 1.2% which is the lowest growth rate since March. The unemployment rate fell from 4.4% to 4.3%. Average hourly earnings increased 2.5% in August which was below the 2.6% estimate. Average weekly hours fell from 34.5 hours to 34.4 hours. The average weekly earnings fell from $909.42 to $907.82. On a year over year basis that’s a 2.2% increase That’s the most important stat which is why this report was a bust. Consumers won’t have much more money in their pockets to spend on holiday purchases if this trend continues.

The labor force participation rate was maintained at 62.9% and the number of people not in the labor force went up by 128,000. As was discussed in a previous article. A great deal of these people out of the labor force are millennials. It will be interesting to see if that trend continues when millennials reach their 40s. Time will tell.

The chart below shows the sectors which added and lost jobs in August. As you can see, manufacturing jumped up adding 36,000 jobs. This is different from the Chicago PMI, but consistent with most other stats saying it’s tough to find workers in manufacturing. Manufacturing was boosted by the automotive sector. The leisure and hospitality sector took a nosedive as the restaurant sector remains in a recession with most firms reporting negative same store sales growth. One of the arguments from the bulls is that August is traditionally the worst month of the year for labor reports on a seasonally adjusted basis. Regardless of this, it still wouldn’t make sense to conclude the economy is headed for a tailspin based on one report. If the October report comes below this headline, then I’d start to worry. I’m ignoring the September report because it will be effected by hurricane Harvey and it’s possible hurricane Irma also has an impact.

Conclusion

The S&P 500 is 0.18% off its all-time high despite the weak labor report. The stock market rallied on this report because it keeps the Goldilocks economy going. If the report fell below 100,000 jobs created, it would be too cold and indicate recession risk was elevated. If it was above 225,000 jobs, it would be too hot, pushing the Fed to raise rates in December. That doesn’t mean I would have preferred this report over there being 180,000 jobs created, but it means it isn’t a bad signal for the stock market.