Market Looks Poised for a Bounce After Jobs Report Amid Trade Optimism, Tech Rebound

A stronger-than-expected government report on the nation’s employment situation provided investors with some good news to cap a dismal week that saw worries about global economic growth ratchet up.

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6 min read

Key Takeaways

  • U.S. nonfarm payrolls rose 312,000 in December, far exceeding consensus

  • China, U.S. leaders to meet on trade in coming days

  • Netflix, Intel shares gain after bullish analyst notes

(JJ Kinahan, Chief Market Strategist at TD Ameritrade, is out of the office.)

(Friday Market Open) A stronger-than-expected government report on the nation’s employment situation provided investors with some good news to cap a dismal week that saw worries about global economic growth ratchet up.

Total nonfarm payrolls in December surged 312,000, well above the 180,000 jobs economists in a Briefing.com consensus had been expecting. November’s number was revised upward from 155,000 to 176,000. 

The report showed that average hourly earnings on a monthly basis rose more than expected. That figure came in at 0.4% instead of the 0.3% gain that had been expected. Over the past year, average hourly earnings are up 3.2%. Treasury rates rose after the announcement, reversing much of yesterday’s fall in yields. Also significant is an uptick in the labor participation rate, to 63.1, up from 62.9, perhaps indicating a rise in employment opportunities for previously “discouraged” workers.  

Jobs Report Comes On Top Of Positive Sentiment

But overall, the stock market maintained most of its gains immediately following the report. Trading before the jobs number saw equity index futures on the rebound after stocks tanked the day before.

Apple (AAPL) shares, which had helped drag down the market yesterday, were bouncing along with other tech stocks. Shares of Netflix (NFLX) and Intel (INTC) were helping with the positive momentum as they rose following bullish analyst notes.

Even yesterday’s beaten-down airline stocks seemed ready to rally. Delta Airlines (DAL) shares fell nearly 9% yesterday after reporting lower-than-expected revenue growth during the holiday season. In response, United Continental (UAL) and American Airlines (AAL) slid 5% and 7.5%, respectively. All three airlines were up about 1% in premarket trade today. Still, based on DAL’s results, consider watching whether airline stocks will hit more turbulence as lower fuel prices could create expectations for cheaper flights, which could pressure profits.

On the trade front, news that China and the United States have scheduled trade talks in Beijing for Jan. 7-8 was arguably also a positive for stocks. With Apple blaming deteriorating conditions in China for its surprise downward revenue revision, and a top Trump economic adviser telling CNN that other U.S. companies could take a hit until a deal is struck with China, investors may be thinking that pressure is ratcheting up on leaders to resolve their trade differences. 

Worries over China’s economy have helped drive stock market volatility of late as the trade war between the world’s two largest economies drags on. This week, investors have seen solid evidence of problems in the Chinese economy, with disappointing manufacturing data and Apple’s lower guidance. 

As Goes Apple …

Everything that has mass in the universe has a gravitational pull; the bigger the object, the bigger the pull. That’s why Newton’s apple fell toward the earth.

While it wasn’t gravity that pulled Apple down on Thursday, its fall was still precipitous. The iPhone maker’s shares dropped nearly 10% and helped pull down other companies in its orbit. Tech companies were the hardest hit, with that sector the biggest loser in the S&P 500 (SPX).

The declines came after AAPL said its revenue for the holiday quarter ended Dec. 29 would be significantly lower than expected amid lower iPhone sales in China as the trade war continues. AAPL and other tech companies are heavily tied to the world’s second largest economy, both for sales of their end-products and for the supply chains that help make those products. AAPL specifically cited the ongoing trade tensions between the United States and China, which have dogged Wall Street for months and contributed to the worst year for stocks in a decade in 2018. 

Disappointing Manufacturing Data

But a declining business climate in China, the world’s second largest economy, isn’t just a drag on tech companies. AAPL’s announcement underscores an increasing worry among investors that global economic growth could be in for a slowdown.

The disclosure from AAPL came on the heels of disappointing manufacturing data from China and Europe. A recent index onChina’s manufacturing sector showed contraction for the first time in 19 months. And recent manufacturing data across the eurozone indicated a broad-based slowdown in the region.

If that weren’t enough to spook investors about the global economy, a reading on U.S. manufacturing came in weaker than expected on Thursday, also helping to push stocks lower. 

The Institute for Supply Management’s manufacturing index fell from 59.3 to 54.1 in December. While that still showed expansion, it was a bigger drop than a Briefing.com consensus had expected. Economists there were forecasting the reading to come in at 57.8.

That left investors to digest disappointing manufacturing data from three of the world’s key economies even as they were handed a big piece of anecdotal evidence of a potential economic slowing in the form of Apple’s lowered guidance. 

Risk Appetite Muted on Thursday

Meanwhile, the U.S. budget impasse and partial government shutdown continued, keeping about 800,000 federal workers away from their jobs. It seems likely that the longer those workers remain out of their jobs, the less they will spend and the more pessimistic on the economy they will become. That’s not good news considering recent consumer confidence numbers, which fell more than expected.

With all the unease swirling about, investors retreated from stocks and into perceived safe havens. Both gold and the yen climbed, and U.S. government debt yields fell. The 10-year Treasury yield dropped farther away from the psychologically important 3% mark. 

One thing to consider watching as trading unfolds today: If investors and traders feel confident enough to hold onto riskier positions heading into the weekend, that could bode well for bulls on Monday, but if not then we could see the market give back some of this morning’s gains.

Figure 1: Apple and the Market: While correlation doesn’t always mean causation, Apple has often been a market leader, both on the upside and on the downside. Last year, a peak for the stock (purple line) came at roughly the same time as a peak for the S&P 500 (candlestick chart). Recently, both have been falling sharply. Data Source: S&P Dow Jones Indices Chart source: Thethinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

Investors Increasingly Believe in Dovish Fed: As government debt yields slumped amid safe-haven bond buying on Thursday, the 2-year Treasury yield briefly fell below the effective fed funds rate of 2.4% (recall that the Fed has set its target Fed funds rate in a range between 2.25% and 2.5%).  That may mean that investors don’t think the central bank will be able to raise rates as much as it has previously telegraphed. The latest from the Fed suggests that policy makers have been considering two interest rates hikes this year. But based on futures activity, the market has its own ideas. Futures are showing about a 6% chance of a cut in the fed funds rate by the March meeting and a greater likelihood of two cuts between now and December than even one hike, according to the CME Group FedWatch tool. It may be worth being cautious with these predictions, however, as they could be setting up the market for disappointment. After all, the U.S. economy is still expanding, and the Fed might end up being more hawkish than the market wants.

Earnings Season Coming Up: With all the doom and gloom swirling about the market, it may be easy to forget that 2018 saw some bumper corporate earnings and this upcoming earnings season is expected to also show earnings growth. According to S&P Global Market Intelligence, Q4 2018 earnings per share (EPS) growth is expected to come in at 13.7% while full year 2018 EPS growth is pegged at 22.5%. But as investment research firm CFRA reminds us, S&P 500 companies through Q3 2018 had recorded 27 back-to-back quarters where actual results exceeded end-of quarter estimates. If that happens this upcoming earnings season, investors might have something to cheer about. 

Happy Job Hunting?There’s another labor-related economic report on the horizon in the form of the monthly Job Openings and Labor Turnover Survey (JOLTS) report. The labor turnover report focuses on job availability, along with hiring and separation trends such as retirement. What might matter most for this report is “voluntary quits,” meaning workers who have the confidence to leave a job for what they believe will be a better one. Keep in mind that the upcoming report is for November, so even if people were confident enough to leave their jobs then – perhaps in hopes of making more money at a new job as the new year approached – that might be reflective of stronger sentiment than what we have now. Still, it could be interesting to see how confident people were in finding a new job even with the tight labor market, especially in light of today’s monster jobs report. 

All the best,

Shawn

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Economic calendar for week of Dec. 31. Source: Briefing.com
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Key Takeaways

  • U.S. nonfarm payrolls rose 312,000 in December, far exceeding consensus

  • China, U.S. leaders to meet on trade in coming days

  • Netflix, Intel shares gain after bullish analyst notes

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