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Finding the Silver Lining: Jobs Growth Below Expectations But There Are Positives

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January 6, 2017

(Friday Market Open) December’s jobs report looked a bit lukewarm on the surface, but had its share of silver linings. Market reaction was muted early Friday, marked mainly by a slight rise in bond yields.

Job growth for December totaled 156,000, the government said. That was below the range of expectations, which had been for 170,000 to 180,000, and below the average for 2016, which had been around 180,000. Unemployment clicked up a notch to 4.7%, in line with Wall Street analysts’ expectations.

Leading industries for job growth were health care and social assistance, the Bureau of Labor Statistics said. Employment in food services also rose. The positive in this report is that we saw job creation in transportation and warehousing, as well as in manufacturing. These are two areas worth watching as the year goes forward, especially because the incoming administration has promised to focus on these areas of the economy. We’ve lost 63,000 manufacturing jobs over the last year.

The rise in food services jobs could also be seen as positive, because it means people are taking the chance to open restaurants and bars. Food services jobs tend to be low-paying, but as long as food services doesn’t lead in job growth and jobs are being created elsewhere, it’s not necessarily a negative sign.

Looking for more good news? Average hourly earnings rose 10 cents, or close to 0.4%. That was above expectations, and means average hourly earnings rose 2.9% in 2016, well above the rate of inflation and the highest year-over-year rise since mid-2009. Still, for the year, wage growth was a bit slow, though the arrow was headed in the right direction.

What does all this mean? Well, job growth in total for 2016 came in at 2.2 million, not far below the 2.7 million we saw in 2015. It’s not that big of a variance. If we look at 2016, we could call it the year of consistency for employment. The economy created about the same amount of jobs and in the same areas, including health care, food services and business-to-business services.

Early market reaction to the jobs report was muted, with bond yields moving a few ticks higher and stock futures pretty much unchanged. On Thursday, the S&P 500 Index (SPX) finished flat, but the Dow Jones Industrial Average (DJIA) lost some ground, mainly due to weak performance from the financial sector. Nasdaq, however, made light gains, helped by a surge in biotech stocks.

While the stock market treaded water Thursday, bonds put on a show, with 10-year Treasury yields falling 10 basis points to around 2.37% by the end of the day. That’s a far cry from the nearly 2.6% level the yield reached last month, and marked the lowest close for the 10-year yield since early December (see chart below). Real estate and utility stocks both rose Thursday along with bonds, as a decline in bond yields tends to help interest-rate sensitive sectors like these.

The weakness in yield may have reflected to some extent a somewhat weak private job creation report released early Thursday by ADP. As bonds rose, the dollar fell, dropping more than 1%, and the euro climbed back above $1.06 for the first time in this new year. The weak ADP jobs report seemed to put pressure on the greenback.

Remember to be on the lookout today for several Fed speakers. Richmond Fed President Jeffrey Lacker speaks at 1 p.m. ET; Chicago Fed President Charles Evans talks at 1:15 p.m. ET; and Dallas Fed President Robert Kaplan takes the stage at 3:30 p.m. ET.

S&P 500

FIGURE 1: TREND CHANGE?

The S&P 500 Index (SPX), plotted here through Thursday on the TD Ameritrade thinkorswim® platform, didn’t move much ahead of today’s jobs report. But the bond market rallied, sending 10-year Treasury yields (represented by the purple line) down to their lowest point in about a month, under 2.4%. Could this bounce in the beleaguered Treasury market last? Source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

GDP Forecasts Lower for Q4: In data news early this week, U.S. factory activity and construction spending both showed more signs of an expanding economy, December auto sales came in above expectations, and ISM services data also beat estimates. But average projections from some of the major U.S. investment banks for Q4 gross domestic product (GDP) are coming in around the 2% mark, well below the government’s final Q3 GDP growth estimate of 3.5%. The Atlanta Fed estimates 2.9% growth in Q4, and that’s among the highest predictions. The first estimate from the government on Q4 GDP is due Jan. 27.

Could This Be The “Year of Legislation?” If 2016 was the year of the unexpected, including Brexit, the Cubs’ World Series win, and the election of Donald Trump, then 2017 might end up being the year of legislation. Namely, legislation in Congress to do some of the things Republicans have proposed, including cutting corporate taxes, pulling back on some regulations, and allowing companies to repatriate some of their foreign earnings. Now, a lot of promises get made on the campaign trail. It could be interesting to see if any of these come to fruition this year, possibly affecting the stock market.

Closing the Books on 2016: Didn’t it seem like the stock market recorded a lot of new all-time highs in 2016? Maybe, but it didn’t come close to the record. The S&P 500 Index (SPX) posted 18 new all-time highs in 2016, tying it with 1992 for 23rd place, and well below 1995’s peak of 77, research group CFRA reported. Other interesting statistics on 2016 complied by CFRA: The SPX’s 24% advance from the Feb. 11 closing low of 1829.08 to the Dec. 13 high of 2271.72 was less than the average annual high/low spread of 27% since 1945, and well below the 67% trough-to-peak surge in 2009. Also, despite last year’s seemingly wide spread, the SPX recorded 48 days of daily price moves of 1% or more, versus the 72-year average of 51.

Good Trading,
JJ
@TDAJJKinahan

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JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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