Investors might be breathing a sigh of relief as Friday’s jobs report didn’t sound too many alarms about the U.S. economy. At the same time, there could be some rough water to navigate on the way to the weekend as China tension mounts and wheels spin in Washington.
The U.S. economy added 1.8 million jobs in July, the Labor Department said, down from 4.8 million in June. Unemployment slipped to 10.2% from 11.1% the previous month. While a sharp monthly drop in the rate of job growth would normally get a bearish read, in this case, the focus could be on the number being a bit better than many analysts had expected.
Average estimates had been edging down all week going into the report—some analysts had expected less than one million or even flat jobs growth. For the most part, investors are likely to see this number as a relief and confirmation that the economy continued to come out of the worst aspects of the pandemic last month.
One major caveat, however, was a very large rise in the number of people who usually work part-time. That jumped 803,000 to 24 million in July. The number of full-time workers remained relatively unchanged. This suggests that the jobs being created aren’t necessarily the kind of permanent, high-paying ones that people can build a career around. But still, a baby step in the right direction is better than this spring’s giant leaps backward.
Digging Into The Jobs Numbers
In addition, 529,000 of the jobs created in July were in the Leisure and Hospitality space, meaning bars, restaurants, hotels, and places like that. There’s nothing wrong with these jobs, and the addition of so many says good things about the economy emerging from shutdown. However, once again, these don’t tend to be the highest-paying positions.
Government employment was another big gainer, with 301,000. Usually, government job growth is biggest earlier in the year, the Department of Labor said, but that got pushed back by the pandemic. In a normal July, a lot of these jobs wouldn’t have hit the report.
Also, manufacturing jobs growth barely budged in July. That’s an area anyone hopeful about economic prospects would want to see going up more than it did.
Those are the negative takeaways. The positive one is that job growth of nearly two million means the economy continued to recover in July, though at a slightly slower pace. It’s hard to imagine the blistering growth of May and June continuing, anyway, since so much of it likely reflected rehiring as the shutdown ended.
Going into the report, estimates were all over the place for the headline number. Some analysts expected as many as three million new jobs while others thought one million and a few bears even expected zero or negative results. This reflects how much confusion is out there regarding the pace of rehirings and whether that slowed down after a huge May and June. It also reflected concern over news of the virus spreading in July and some businesses shutting back down.
The mid-July weekly initial jobless claims numbers rose two weeks in a row, also sowing some concern. A drop in claims last week was soothing, but new claims are still above one million a week, not where anyone wants them.
In sum, it’s a relief to see these numbers, aside from the caveats mentioned above. Stocks started to cut their losses in pre-market trading after the report appeared. The market, however, is far from out of the woods today.
Beyond Jobs
Looking past the payrolls report, there’s some news weighing on stocks ahead of the opening bell. More tension between the U.S. and China sent Hong Kong shares down overnight and seems to be hurting companies like Alibaba Group Holding Ltd BABA and Tencent TCEHY early Friday. This could be giving the dollar some strength, which could put downward pressure on commodity prices, as well.
Pretty much any Chinese company listed in the U.S. is coming under added scrutiny about reporting standards and other items. TCEHY is getting hit pretty badly early on, as it owns WeChat, a popular app being targeted by President Trump’s executive order.
Also, as you probably read in the media, there’s no progress in Washington on a new stimulus package. The market’s been acting like an agreement was a foregone conclusion, and had basically ignored a lot of the sparring. If we head into the weekend without any positive developments, it might cause some late-session jitters.
It could actually be an eventful day today, even beyond the jobs report, as we look to Washington and anything else connected with China.
This One Goes To 11,000
Before payrolls hit town this morning, the S&P 500 Index (SPX) ended Thursday just 37 points from its all-time high close and the Nasdaq (COMP) finished above 11,000 for the first time ever.
The COMP’s ride since early June from 10,000 to 11,000 resembles the fast clip of the Dow Jones Industrial Average ($DJI) when it went from its first 10,000 close to 11,000 back in 1999. It took the COMP less than two months to power to 11,000 after first closing above 10,000 on June 10.
In 1999, the $DJI went from its first 10,000 close on March 29 to its first 11,000 close on May 3, just a bit faster. Both are pretty incredible, though times have changed a lot in 21 years. The COMP’s rapid rise here shows the coronavirus hasn’t zapped peoples’ appetite for equities, but the concern is that so much of the buying has been concentrated in a few high-value names (see chart below).
In earnings news late yesterday, Uber Technologies Inc. UBER posted a worse Q2 loss than analysts had expected but came in a little better on revenue than the average Wall Street estimate. The revenue beat didn’t seem to help shares, which fell nearly 3.5% in pre-market trading just ahead of the opening bell.
Maybe that’s in part because revenue was down 29% from a year ago as UBER continues to struggle with ride bookings in these uncertain times. Bookings in the company’s core ride-sharing business were down 73% from last year, but delivery bookings doubled.
Another Fling For The FAANGs
Nothing seems to be stopping the FAANGs, which rolled up another session of solid gains Thursday. All rose at least 1%, with Apple Inc. AAPL climbing more than 3% and Facebook, Inc. FB leading the pack with a 6% gain. Investors continue piling into these as well as the semiconductors and Microsoft Corporation MSFT as they seem to be seeking potential ports in a storm.
As we’ve been noting, it’s not surprising to see companies with lots of cash and solid balance sheets enjoying the most benefit from this year’s long crisis.
It’s not simply a matter of the “stay at home” trade favoring companies like the FAANGs that help us work and play from our living rooms. Many investors want a sense of security, even if no stock is a truly safe investment. The thick, well-built walls that companies like MSFT and AAPL appear to boast at a time when there’s almost no reward for keeping cash or buying bonds might provide some people with that warm, cozy feeling.
Meanwhile, the cautious tone that permeated markets early yesterday hasn’t gone away, despite the COMP’s new milestone. The 10-year yield remains near recent lows and gold sits near recent highs, a combination that would often signal risk-off if it weren’t for the opposite happening in equities.
That said, the stock rally remains top-heavy and is mainly in Info Tech, Consumer Discretionary, and Communication Services (the home sectors of the FAANGs) over the last week. The rest of the sector scorecard over that time looks flat to lower.
CHART OF THE DAY: QUICK RIDE TO 11,000: The Nasdaq (COMP—candlestick) closed above 11,000 on Thursday for the first time less than two months after its first 10,000 close. It’s been powered mainly by the FAANGs, especially Apple (AAPL—blue line) and Amazon (AMZN—purple line). These two stocks’ combined value is about 24% of the value of the top-100 COMP stocks. Data Source: Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
What Can I Say? If you’re a seasoned investor, maybe you have friends asking you why the stock market is performing so well in these tough times when there’s so much uncertainty. One thing you can consider telling them is that the stock market tends to trade four-to-six months ahead of the current state of earnings and the economy. At this point, no one knows what the virus's impact will be by next winter. However, optimists seem to be in control for the moment, and they appear to be expecting progress by then.
The low-interest rates also play a big role. Recent years show a tendency for rallies when rates are soft, with higher rates like we saw in the fall of 2018 sometimes being rally killers.
Outweighed Tech: With the FAANGs, Microsoft, and semiconductor stocks like Advanced Micro Devices, Inc. AMD and Nvidia Corporation NVDA dominating the headlines, it’s easy to forget there’s a lot more to the S&P 500 Information Technology (IXT) group. When you look at the biggest Tech players outside of FAANG, MSFT, AMD, and NVDA, the list includes companies like Intel Corporation INTC, Cisco Systems, Inc. CSCO, Oracle Corporation ORCL, and HP Inc HPQ.
Combined, these four have a market capitalization of around $600 billion, which is nothing to sniff at even if together it only amounts to slightly less than one-third of Apple’s value. Yet, unlike AAPL, these companies aren’t exactly tearing up the pea patch this year. INTC is down 25% year to date, hurt recently by a delay in one of its major products. ORCL is up about 2% this year as its cloud and software businesses face tough competition. CSCO is roughly flat, with analysts saying its business has been vulnerable to the global economic downturn. That also seems true for HP, the smallest of the four, where shares are down 13% year to date.
Tech isn’t monolithic. The biggest of the big (AAPL, MSFT)—along with two of the largest and best-performing chip stocks (AMD and NVDA)—have separated themselves from the pack. The gargantuan market caps of MSFT and AAPL, along with the huge ones of NVDA and to some extent AMD, allow these behemoths to exert so much influence on IXT that it might not be the best measure of Tech performance any longer. So if the headlines say “Tech is up,” it might be a misnomer.
Gas Leak: If you’re looking for more data that suggests the economy is picking up, you don’t need to go any farther than the last two weeks of crude oil inventory data from the U.S. government. Inventories fell about 7.4 million barrels last week and 10.6 million barrels the week before, numbers pretty close to what crude market watchers would expect this time of year. In a normal year, these sorts of withdrawals would hardly rate a mention, but things aren’t normal this year, obviously. Gasoline production also rose last week, which could hint that both summer vacationers and business delivery trucks are out on the roads in higher numbers.
Still the pandemic’s effect is pretty evident when you pull back and look at the bigger picture in crude. U.S. supplies of 518.6 million barrels are up from 438.9 million the same week a year ago and 16% above the five-year average, the Energy Information Administration (EIA) said. Also, some of the decreases in crude inventories likely reflect lower imports as demand still struggles. Crude prices are down around $15 from where they traded a year ago, but the front-month futures contract seems to have developed some nice technical support at $40 a barrel and recently hit five-month highs above $43. Any test of the $45 to $50 level would probably have a positive impact on equities, especially the Energy sector.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
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