Employment Friday: Solid Report, but Tech Sags, Trade Worries Loom

The Labor Department reported a rise in both jobs and hourly wages in its monthly snapshot released this morning. But tech shares look to be headed for a 4th day of weakness.

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Key Takeaways

  • Payrolls report beats Wall Street estimates for both jobs and pay, but earlier numbers revised lower

  • Concern could rise about possible inflation as wage growth approaches 3% year-over-year

  • Tech remains in a downturn, with shares looking like they might start out weak again

(Friday Market Open) If you got a bigger paycheck in August, you’re not alone.

Jobs growth jumped last month and so did wages, the government said Friday. The economy created 201,000 new jobs and average hourly pay rose 2.9% year-over-year and 0.4% month-over-month. The higher than expected wage growth could potentially revive some of the inflation fears seen earlier this year, but there are caveats.

Employment Report Roundup

Both wages and jobs grew faster than Wall Street analysts expected in August, and appear to be good news for workers and signs of strength in the economy. It might be interesting, however, to see how the market reacts, because wage growth is now pretty close to 3%. Earlier this year when January wage growth rose 2.9%, the data might have contributed to a stock market correction in the following weeks amid concerns that the economy might be overheating. Stocks retreated in pre-market trading Friday as investors weighed the numbers.

Wage growth moved up from 2.7% in July and is likely to be in the spotlight today, but here comes the caveat mentioned above: The higher pay should probably be taken in context because the biggest gains were in business and professional services, which added 53,000 jobs in August. These might have been higher paying than some of the categories that saw little change in the month, including retail and leisure and hospitality, increasing the overall number a bit more due to the kind of jobs that added positions. The 0.4% climb in wages from July compared with analysts’ average estimate for about 0.2%.

This doesn’t mean wages aren’t rising, only that the quality of jobs created might be improving. That could play into the wage growth at least a little.

The headline number stood out by coming in above Wall Street analysts’ expectations for around 187,000, but again there are caveats that point toward less possibility of overheating. The government downwardly revised July’s already low number down by 10,000 to a total of 147,000. It also downwardly revised the June figure by a pretty big 40,000, down to 208,000. That means the three-month average—one of the best ways to track job creation—stands at 185,000. A solid number and not one that necessarily implies the economy getting too hot.

Other areas that saw decent growth included health care, which rose 33,000; wholesale trade, which rose 22,000, and construction, up 23,000. The jobs being created by this economy continue to center on areas where people can build careers, and that could partly play into the solid rise in wages. Overall unemployment remained at 3.9%, while labor force participation declined slightly to 62.7%.

The report seems likely to give the Fed more reason to think about hiking rates when it meets later this month, and also could support a fourth 2018 rate hike by the end of the year. Chances for a fourth hike are now above 75%, according to CME Group futures. Concerns about a more hawkish Fed could potentially bring some pressure to the stock market.

Nasdaq Sag Reaches A Third Day

Three days in a row. That’s the Nasdaq’s (COMP) string of losses through Thursday as the index continued to sag after its long August winning streak. Shares of Amazon (AMZN), Facebook (FB), Apple (AAPL), and Alphabet (GOOG) soaked up new losses, though Netflix (NFLX) did manage a slight comeback. Yep, the FAANGS are hurting a bit. Some of the weakness might stem from this week’s resurgence of privacy issues for social media associated with some companies appearing before Congress. AAPL and AMZN shares might just be taking a breather after both made big runs in August.

Another loss leader Thursday was the chip sector, with Micron (MU) among the hardest hit (see more below) due in part to pricing issues for one of its key products. Though COMP clawed back late in the day from its steepest midday losses, it wasn’t enough to prevent a nearly 1% drop. The index finished Thursday down more than 200 points, or around 2.5%, from last week’s all-time high. 

Though it’s been a rocky week, keep in mind that all the major indices remain much higher for the full year. The COMP is up 14.8% year-to-date, the S&P 500 (SPX) has risen 7.7%, and the Dow Jones Industrial Average is up 5.2%. Also, volume has been relatively moderate this week, perhaps a sign that there’s no major wave of selling taking place. It’s more of a slow leak. We’re also just a few days removed from the best August stock market performance in four years. 

Sector Shuffle

While it’s been a rough week for tech, non-cyclical sectors including telecom and utilities both posted strong gains Thursday as it appeared some investors might have been looking for possible protection from volatility and selling pressure in tech and financials. Earlier this week there appeared to be some sector rotation at work out of tech and into other sectors. That may have been the case again Thursday.

Meanwhile, the Treasury market, which had been relatively flat earlier in the week, found some buying interest Thursday. Ten-year yields, which move the opposite way of Treasury notes, fell back below 2.9%, another possible sign of investor caution. 

Not everything was red. The $DJI rose again Thursday as some of the big multinational names like Caterpillar (CAT), Lockheed Martin (LMT), Deere (DE), and Boeing (BA) all gained. Industrials do seem to be finding some investor attention lately, perhaps part of the sector swing out of tech. However, the trade issues still hanging over the market have contributed to industrials under-performing the broader S&P 500 Index (SPX) over the last three months.

The immediate trade worry may be the Trump administration’s threat to slap tariffs on $200 billion in additional Chinese goods, something that analysts say could happen as soon as today. The public comment period on the proposed tariffs, which range between 10% and 25%, ended yesterday. China has retaliated with tariffs of its own on U.S. products recently when the U.S. announced tariffs.

Crude Crumbles, But SPX Hints At Technical Strength

Crude oil continues to slip, falling below $68 a barrel despite a weekly U.S. stockpiles report showing a bigger draw than many analysts had expected. Gasoline stocks rose, however, and concerns about demand out of emerging markets like China might be continuing to weigh on crude and other industrial commodities like copper. That key industrial commodity (copper), is down 18% from its highs of earlier this year. Some investors watch copper carefully as a possible barometer for wider economic demand. From a stock standpoint, the crude losses seemed to hit the energy sector pretty hard, and it’s the worst-performing sector over the last month.


From a technical perspective, the SPX might have gotten some positive news in the late going Thursday. After sinking a few points below the old January high of just above 2872 at midday, the index climbed back to close above that level, perhaps a bullish sign.


FIGURE 1: Biotech Hits Skids: Biotech stocks, as measured by the Nasdaq Biotechnology Index (NBI), out-hustled the S&P 500 (purple line) during parts of the summer, but recently pulled back sharply as some investors appeared to grow wary about possible challenges ahead for what’s been a booming industry (see more below). Data Source: Nasdaq, S&P Dow Jones Indices. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Rubber, Meet Road: While markets have been a bit stuck in the mud lately, two major tire company stocks got on track earlier this week and rolled along to decent gains. In fact, tires were the leading industry group in Wednesday’s session, rising more than 4%. This was a change of pace, since shares of two major tire makers—Goodyear (GT) and Cooper Tire and Rubber (CTB)—have both been under pressure much of the year due in part to softer automobile sales and what industry analysts say is a supply glut in the tire industry. The jump on Wednesday, followed by light follow-up gains for both companies on Thursday, might have been related to somewhat better sales reported by some major car companies in August. When tire companies do well, it’s sometimes a sign that consumers are heading to auto dealerships in greater numbers. Overall U.S. auto sales are expected to rise slightly for the month of August, companies said, though they’re not forecasting huge gains for the rest of 2018.

Booming Biotech Sector Might Face Challenges: Biotech is taking a beating this week, but it’s still one of the better-performing industries in the stock market so far this year. The Nasdaq Biotech Index (NBI) is up more than 11% even with recent losses factored in. Biotech appears to have benefitted in part from industry mergers, a booming initial public offering (IPO) market in the industry, lower taxes, and a bit less noise lately about possible government clampdowns on drug pricing. It also might be a recipient of many investors’ embrace of aggressive sectors, including biotech and others like info tech. 

That said, this week’s slump in biotech might raise a caution flag. If it looks like there’s more caution developing overall and “defensive” sectors like utilities and telecom attract more interest, biotech could be an area that suffers. Another possible concern is political. Any change in Washington leadership due to the coming election could potentially bring more regulatory and pricing restraints to bear on the industry, analysts say.

Chip and Dip: To the uninitiated, NAND might sound like the acronym for some kind of secret agency. It’s actually a type of memory chip used by the semiconductor industry, and news of NAND price pressure helped send semiconductor stocks reeling Thursday. Micron (MU) took the brunt of the blow after it announced that NAND pricing declined in Q3, but it looked like the chip weakness might have spread Thursday to the broader market, even beyond technology stocks. On the one hand, the weaker NAND prices appear related to oversupply, industry analysts said. However, when there’s an oversupply of something, it sometimes means there’s slower demand, so that might play into ideas of general tech weakness. NAND memory chips are used in cars, drones, cameras, smartphones and data-centers to support cloud-based technologies, so think beyond chipmakers to see why pricing pressure might have people worried.


Good Trading, 

JJ

@TDAJJKinahan 

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