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Market Update

Jobs Jolt: Big Growth In Key Sectors, Upward Revisions Could Support Stocks

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November 3, 2017

(Friday Market Open) The U.S. jobs market kicked back into gear last month as employers added 261,000 new positions to payrolls and unemployment fell to 4.1%. Even though job creation was a little under expectations for 300,000, pre-market trading pointed toward a slightly higher open.

Other factors that could affect the market today include continued buzz over Thursday’s developments, including the announcement of a new Fed chair, Apple’s (AAPL) excellent quarter, and the tax plan unveiling. It’s a little quiet on the earnings front, but the jobs report and yesterday’s news should keep things from getting dull here at the end of the week.

Looking more closely at payrolls, there was a lot to like. Although many of the new jobs came in the food services and drinking places category — where positions rose 89,000 after falling by even more than that in September after hurricanes blew through Texas and Florida — there was also strong jobs growth in some of the categories we like to see. That included 50,000 new positions in professional and business services and 24,000 new manufacturing jobs. Health care was another gainer. These are the types of jobs that tend to be relatively high paying and where people can build careers.

The Department of Labor also upwardly revised past reports. The September data, which originally showed a loss of 33,000 jobs, now shows an 18,000-job gain. August got revised up to 208,000 from 169,000. This is good to see, and means that even with September’s hurricanes, job creation has averaged 162,000 over the past three months. A lot of economists say just 100,000 a month would likely be enough to keep unemployment low.

One part of the report that didn’t gain was hourly earnings, which actually fell a penny in October. That might reflect the addition of all of those relatively low-paying food and beverage jobs, so let’s come back next month and see how wages might have evened out after the hurricane impacts. Hourly earnings are up 2.4% over the last year, which is ahead of inflation but still a relatively slow gain.

There’s definitely a lot to mull over, but let’s get back to yesterday’s developments. The House Ways and Means’ Committee’s long-awaited tax plan bowed Thursday and immediately people started debating what impact it might have on various sectors. Without going into too much detail about the proposal, it’s important for investors to keep their powder dry and not get too bullish or bearish about the possible ramifications. That said, it’s useful to monitor the process as the bill gets debated, because what happens from here could go a long way toward shaping the ultimate winners and losers from a sector perspective.

As we’ve noted, there’s a long way to go and probably some more wheeling and dealing, with no guarantees this actually gets done. From an initial market reaction standpoint, the homebuilding and home supply company stocks took a hit as investors digested the plan’s proposals to limit mortgage deductions. On the other side, big box retailers seemed to get some support Thursday from the plan’s proposal to cut the corporate tax rate. Retailers tend to pay, on average, the highest taxes of any sector.

For the first time in nearly 40 years, the country gets a new Fed chairman after just one term of the current chair. Jerome Powell has been on the Fed’s board since 2012, and generally he’s voted with Chair Janet Yellen. In that sense, he’s a known quantity. Investors seem relatively comfortable with him taking charge and don’t appear to be expecting major changes in rate policy once Powell moves to the leadership position early next year.

Apple (AAPL) seems to be firing on all cylinders, easily beating Wall Street’s revenue and earnings expectations and even coaxing big revenue out of China where sales recently had come under pressure. In all, the company sold 46.7 million iPhones last quarter, slightly above the consensus estimate. AAPL also guided for fiscal Q1 sales of between $85 billion and $87 billion, compared with analysts’ consensus for $85.16 billion. Revenue grew 12% in China.

It wasn’t just phones for AAPL this time around. It felt a little like 1984 all over again as AAPL reported a 25% rise in Mac revenue to $7.2 billion, compared with just 7% growth the previous quarter. A recent product refresh might have contributed to the Mac sales jump, according to TheStreet.com. AAPL shares climbed to new all-time highs in post-market trading.

The AAPL results continued what generally has been a fantastic earnings season, which is now about 70% through and in which nearly three-quarters of S&P 500 companies have beaten Wall Street’s bottom-line expectations. Research firm CFRA now expects average Q3 earnings growth of 6%, up from its previous 5% estimate. Earnings drive the markets and continue to provide support here as indices trade at or near record highs.

One exception was Starbucks (SBUX). Shares plunged in post-market trading yesterday after its Q3 missed analysts’ revenue estimates. In a press release, SBUX referred to a “difficult operating environment.”

On the whole, the S&P 500 (SPX) barely moved Thursday despite all the news swirling around. The flat market belied what actually were some relatively hefty sector moves, including sharp gains in financials and real estate and major drops in materials, telecom, and consumer discretionary. Info tech managed a slight gain despite losses at Facebook (FB), which fell despite the company’s strong earnings released Wednesday. Investors appeared spooked by the company’s warning about bigger costs as it makes investments to better secure its platform.

U.S. Dollar

FIGURE 1: DOLLAR DELIVERS.

The dollar, which spent so much of this year declining vs. the euro and the yen, has gotten some of its moxie back over the last month. This chart show the euro falling vs. the dollar and the dollar rising against the yen (purple line). This pattern reflects a lot of things, but mainly strength in the U.S. economy. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

About That Tax Repatriation: The Republican tax plan released Thursday would allow companies a one-time chance to repatriate foreign profits at a lower tax rate, as expected. That’s the good news for corporations with lots of profit sitting overseas, particularly some of the big info tech firms. On a different note, the tax rate Republicans proposed for repatriation of cash held abroad is 12%. That’s higher than in previous Republican plans, The Wall Street Journal noted, in order to help keep the overall tax plan from costing too much. Some previous plans had been for 10%, and even that was well above the 5.25% rate back in 2004, the last time a “tax holiday” took place.

It’s unclear how things might play out if repatriation becomes a reality, but last time it happened, a total of 843 companies brought back $312 billion, according to the Internal Revenue Service (IRS). Pharmaceutical and technology companies appeared to reap the most benefits from the 2004 repatriation, according to a 2011 Senate report.

Lingering Question on 2018 Rates: The Fed stood pat on rates earlier this week and the futures market predicts one more hike this year, but the question remains how many hikes to expect in 2018. That’s especially thought provoking considering inflation in Europe and Japan remains stagnant, as does price growth here in the U.S. Economic growth here has picked up, however, with two-consecutive quarters of 3% increases in gross domestic product (GDP). The Fed could be caught between a rock and a hard place, worrying that economic activity might get too hot if it doesn’t raise rates, but also fearing it could nip the improving economy in the bud if it raises rates too fast when inflation isn’t an issue here or abroad and 10-year bond yields languish below 2.4%.

The Fed’s most recent “dot plot” of members’ long-term projections shows a majority of Fed participants expecting rates to rise to 2% or higher by the end of next year from where they are now between 1% and 1.25%. Come back in a year to see how close those predictions turned out to be.

How’s Growth? Check Copper: Sometimes copper is seen as a good analogue for global industrial activity, since it’s used in many manufacturing applications and also in electric vehicles. News on the metal continues to look good despite some concerns about growing supplies. Front-month copper futures prices recently traded at around $3.14 a pound, up from $2.21 a year ago, and hit a three-year high last month. The wildcard for copper is often demand from China’s industrial sector. China’s manufacturing index slipped a little last month, so that could eat into demand for the commodity and perhaps point to some manufacturing softness in Asia. However, U.S. economic indicators continue to look robust, with the Chicago PMI for October reaching its highest level in more than six years. Remember to check copper now and then, because it could tell a broader story.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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