(Friday Market Open) The U.S. jobs machine kept humming along in October despite a soft stock market, creating 250,000 jobs to far exceed Wall Street analysts’ expectations. At the same time, hourly pay rose 3.1%, the biggest jump in almost a decade and one that could conceivably bring inflation fears back into play.
This looks like another great jobs report. The 250,000 gain in payrolls easily surpassed the average 190,000 estimate heading into the report, while the pay gains met expectations. The Labor Department also made some minor revisions to past jobs reports, lowering September’s gain to 118,000 from 134,000, but raising August growth to a massive 286,000. The unemployment rate stayed unchanged in October at a near 50-year low of 3.7%.
The hourly wage increase of 3.1% compared with recent gains of just below 3%, so on its face it’s not a huge change. But investors sometimes pay more attention to big round numbers, so there could be a psychological effect to seeing the increase rise above 3%. Earlier this year, a 2.9% rise sent some investors scurrying for cover amid concerns that higher wages might throw the market into a wage-price inflationary cycle that could bring the Fed in to clamp down on any possible overheating. The same concerns might start creeping in now, and chances of a Fed rate hike by the end of the year inched higher soon after the data.
Right after Friday’s report, the major indices appeared to hold close to where they’d been a few minutes before in pre-market trading, with the Dow Jones Industrial Average ($DJI) still pointing to possible 200-point gains after the open in part on optimism about China trade (see more below), while NASDAQ Composite (COMP) slumped slightly, in part due to disappointment over Apple's (NASDAQ:AAPL) results (see more below).
Looking a little deeper into the data, leisure and hospitality added the most jobs with 42,000 and healthcare added 36,000, but manufacturing and construction—which tend to be hallmarks of a booming economy—also posted solid gains of 32,000 and 30,000, respectively. Other areas with decent gains included transportation and warehousing (25,000) and business and professional services (35,000).
It’s hard to find anything wrong with this report, which showed job creation rising for the 97th consecutive month and continued stellar numbers out of the health care sector. The only place where things might have gotten a little overblown was leisure and hospitality, which may have seen some pent-up demand due to the hurricane earlier this fall.
Under The Peel
Apple earnings, as always, had the potential to either slow the market’s momentum or help put more wind at its back. This time, the company’s results seemed to bring some bears out of the woods, as shares sank more than 6% in pre-market trading. If this holds up, it would be the biggest single-day decline in AAPL shares in more than two years. In a nutshell, Apple’s results were certainly not a disaster.
The quarter had its low and high points, but investors seemed to focus at least initially on the disappointing ones. Though AAPL beat third-party consensus estimates for both earnings per share and revenue, iPhone unit sales of 46.89 million were a bit shy of Wall Street’s estimates. The average selling prices for the iPhone, on the other hand, rose to $793, up from $724 the previous quarter and beating Factset’s estimate of around $750.
Disappointment seemed to center on the iPhone unit sales number and the company’s fiscal Q1 guidance of $89 billion to $93 billion, which was just below the average analyst estimate of $93.02 billion. Looking at things from a high level, the average selling price gain could be seen as healthy because it might send the message that AAPL’s higher-priced phones are gaining traction with its customer base.
However, the miss on iPhone unit sales could indicate that people are waiting longer to replace their old phones, not such a good development. As for the guidance, AAPL has often been conservative on its guidance, but some investors might have wanted to see AAPL projecting a blowout holiday quarter, especially after the disappointing holiday quarter guidance from Amazon (NASDAQ:AMZN) last week.
It also may disappoint some investors to hear that AAPL won’t break out iPhone unit volume in its earnings any more. The street doesn’t tend to like when companies cut back on what investors see as an important number for guidance. Lots of companies don’t report product unit sales, but the iPhone arguably isn’t just any product.
China Fortunes Keep Swaying Market
To get a sense of just how large U.S./China trade issues loom going into the meeting between the country’s leaders later this month, consider the action in stocks Thursday morning. Things were chugging along a little higher before a tweet from President Trump in which he said he’d had a productive conversation with Chinese President Xi. The $DJI quickly scampered to 200-point gains, even though the tweet lacked much detail.
Then early Friday, stock futures jumped to more big gains after what sounded like encouraging words from President Xi on state television, according to media reports. The 300-point gain in DJIA futures seemed to come based just on the two leaders’ comments, with no details offered about what kind of agreement might be in store or when it could be reached. Those gains got pared in the hour ahead of the opening bell after CNBC reported an administration official saying, “there’s a long way to go” to reach a deal. Stocks overseas, particularly in Asia, had risen overnight in part on the trade rumored detente.
Xi and Trump are scheduled to meet at the Group of 20 (G20) Buenos Aires summit Nov. 30-Dec. 1, so investors might want to consider staying tuned for any previews of that. The threat of U.S. tariffs on an additional $267 billion in Chinese goods could be one factor that continues to keep the market slightly in check until investors have a better sense of whether these trade issues can get resolved. Recent economic data from China have been mixed, and the U.S. administration says “nothing is set in stone” on whether those additional tariffs will take effect, media reports said.
To sum up, there’s probably no issue right now as close to the minds of most investors as trade with China. Even the U.S. midterms arguably don’t seem to have as much force. This remains one reason why it’s probably safe to say that volatility doesn’t seem to be going anywhere anytime soon.
Three In A Row
Before AAPL and payrolls, the stock market posted its third-straight day of healthy gains Thursday. The Dow Jones Industrial Average ($DJI) has gained 900 points over this stretch. The comeback, which took the major indices out of correction, could be evidence that the sell-off probably didn’t reflect panic (except for a frantic 30 minutes before the close one day last week), but instead might have been many people taking profits and maybe looking for their next opportunity. Pretty much everything moved in an orderly way downward except for that one afternoon, and the orderly selling and the quick snap back this week could indicate that people in general didn’t give up on the market.
However, a word of caution: This rally has been very quick and the markets aren’t far now from where they were when all this craziness started. For long-term investors, it’s arguably more important than ever to have a plan and stick to it. Before buying a company at what might look like a bargain price, consider asking yourself if the company’s fundamentals have changed, and whether buying its shares fit into your plan going forward. These are weeks when it can really help to have a game plan and not get sucked in by the minute-to-minute fluctuations.
Crude Leaks To Seven-Month Lows
Meanwhile, crude got hammered, with U.S. futures hitting their lowest level since April on Thursday to close at $63.69 a barrel. That’s down from above $75 a month ago. Climbing U.S. stockpiles and rising production from Saudi Arabia and Russia all could be playing into this, and demand fears amid widespread declines in world stock markets also could be a factor. In other commodity news, gold moved higher Thursday, perhaps because some investors see it as an inflation hedge. The gold rally aligned with the dollar pulling back from recent yearly highs, perhaps in part because some investors seem to have started to reverse the “risk-off” attitude they’d taken as stocks plunged last month.
Over in the data department, October U.S. auto sales drifted in throughout Thursday from various companies, with Fiat Chrysler (NYSE:FCAU) enjoying a strong resurgence and Toyota reporting slight gains, but Ford (NYSE:F) reporting a 3.9% drop from a year earlier. One thing that seemed pretty clear looking across the spectrum was continued strength in the SUV market but falling demand for sedans.
In other earnings news after the close, Kraft Heinz (NASDAQ:KHC) shares plunged in post-market trading after the company missed Wall Street analysts’ earnings estimate, while Starbucks (NASDAQ:SBUX) shares steamed higher after beating estimates. Before Friday’s open, Exxon Mobil (NYSE:XOM) shares rose 2% on solid earnings for the huge energy company.
FIGURE 1: Dollar Dozes: After a steady ride higher over the last couple of weeks that took it to new highs for the year above 97, the dollar index retreated the last two days, perhaps in part because some investors started to cut back on their “risk-off” pose adopted during the stock market sell-off. Gold (purple line) initially weakened this week as the dollar kept climbing, but might have gotten a boost Thursday from the dollar’s struggles and as investors could be looking to hedge inflation. Data Sources: ICE (NYSE:ICE), CME Group (NASDAQ:CME). Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Getting Things Done: More good economic tidings this week came in the form of improved U.S. productivity. In Q3, productivity rose 2.2%, the government said, and Q2 productivity was upwardly revised to 3%. That’s quite a jump from the anemic growth in Q4 and Q1, which essentially was zero. Generally, improved productivity tends to characterize a quicker-growing, more dynamic economy and can often lead to better quality of life. In the 1960s, productivity growth averaged around 5% for the world’s leading economies as new manufacturing technologies, infrastructure, and energy sources helped lead to rapid growth. It’s really tailed off since then, and now a quarter with 3%, like Q2, looks very strong compared with trend, which has been barely above 1% the last few years. The uptick in Q3 productivity was the result of output increasing 4.1% and hours worked increasing 1.8%, Briefing.com noted.
What might help push productivity into a prolonged upswing? One analyst on CNBC suggested Thursday that freer global trade and more innovation from the technology sector might help. A challenge, he added, is that much of the technology sector is now concentrated in a few large firms, which might staunch innovation. That said, the quarterly numbers could remain interesting to watch in the months ahead to see if this mini-rally can continue.
Semiconductors Recharge: One interesting thing about the rally over the last three days is how semiconductors, a sector that got taken to the woodshed over the last few weeks as the market tumbled, revived in a major way. Just as stocks like Nvidia (NVDA) and Advanced Micro Devices (NASDAQ:AMD) were among the first to get hit really hard in the downturn, they were also some of the first to show strength when the market started to turn around this week. NVDA shares have rallied back 18% from the recent low mark posted Monday, while AMD have come back 20% since that same day. The chip makers originally started to sag amid fears of possible declining demand and potential tariff impacts. Those issues haven’t necessarily gone away, but it does show the kind of impact geopolitical fears can have on sectors like this one. This time, the fear might have gotten a bit overdone.
Don’t Forget the Fed: With all the ruckus this morning about employment, it’s easy to forget that there’s a Fed meeting next week. At this point, the futures market projects about a 93% chance of the Fed leaving rates alone at this particular meeting, but an 80% chance that rates will go up by the end of the year. One interesting note is that this is going to be the last Fed meeting without an accompanying press conference. The Fed announced earlier this year that there would be a press conference at every meeting starting in 2019. As always, next week’s meeting will be followed by a statement. In its last statement, back in September, the Fed cited what it said was “strong” economic activity and jobs growth, with inflation remaining near its 2% target. Risks to the outlook, it said, were “balanced.” Next Wednesday afternoon, investors might want to take a close look to see if any of that language evolved.
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