Market News – February 4, 2019

BIG JUMP:  The U.S. economy added 304,000 jobs in January.  This was the 100th straight month of increased employment (see graph below).  The consensus expectation was about half that figure.  Despite the shutdown, companies kept hiring.  The unemployment rate ticked up from 3.9% to 4.0% due to two factors.  First, 176,000 government workers on temporary layoff skewed the figures.  Second, more people jumped back into the labor force.  The Labor Force Participation Rate increased to 63.2%.  There are 2.8 million more Americans working now compared to one year ago.  Average hourly earnings in January were 3.2% higher than January of a year ago.

ANOTHER ENCOURAGING LABOR STATISTIC:  Due to lots of baby boomers retiring and younger people waiting longer to join the work force, an important ratio has been the labor force participation rate for Americans between the ages of 25 and 54, the so-called “prime” working years.  From the 1960s to the 1990s this trended up sharply as more women entered the labor force.  It leveled off for a while before trending down after the Great Recession.  In 2016 this statistic finally seemed to bottom out and has been trending up ever since.

ANOTHER STRONG WEEK IN THE MARKETS:  Fears of an economic slowdown, that caused a very bad fourth quarter of 2018, have been eased by better-than-expected corporate earnings reports, a more-accommodative Federal Reserve, and strength in the labor market.  On Friday, U.S. markets ended strong when Exxon and Chevron led the way.  They both jumped more than 3% after posting their biggest annual profits in years.  About half of the S&P 500 corporations have reported earnings, and 70% have surprised to the upside.  The trade negotiations with China, another fear factor for the markets, will be watched closely along with the prospects for another government shutdown and continued prospects of strong corporate earnings growth.  January was the best performing month on Wall Street since 1987.

NOW WHAT?:

On the negative side:

Companies face three pressures on their profit margins:

• Tariffs
• Higher wages
• Higher interest rates

Potential geopolitical conflicts have not been priced into the markets, and if they occur they will put downward pressure on stock prices.  The obvious potential conflicts involve Korea, China, Russia and Syria.

Finally, business cycles always end, and when will this very long recovery end?

On the positive side:

The steady flow of negative headlines has suppressed market prices.  If these fears do not materialize, markets will likely continue to rise.

Companies are converting tax savings into capital expenditures and investments.

Merger and Acquisition activity and buybacks could pick up, especially from freed up, overseas cash.

JUMP IN NEW HOME SALES:  The U.S. Commerce Department just released November numbers, and 657,000 new homes were sold, a number that is 17% higher than October and is an 8-month high.  The median sale price was 12% lower than a year ago which probably helped boost sales.  Year-to-date (i.e., through November), sales were running 2.7% higher than 2017.

REFERENCES: 

BIG JUMP:https://www.wsj.com/articles/u-s-employers-added-304-000-jobs-in-january-unemployment-ticked-up-due-to-shutdown-11549028008?mod=searchresults&page=1&pos=3; https://www.calculatedriskblog.com/2019/02/january-employment-report-304000-jobs_1.html
ANOTHER ENCOURAGING LABOR STATISTIC:  https://www.calculatedriskblog.com/2019/02/comments-on-january-employment-report.html
ANOTHER STRONG WEEK IN THE MARKETS: https://www.wsj.com/articles/global-stocks-edge-up-after-a-january-surge-in-the-u-s-11549010981?mod=searchresults&page=1&pos=5; https://www.cnbc.com/2019/02/01/stock-market-payrolls-data-earnings-in-focus-.html
JUMP IN NEW HOME SALES:  https://www.marketwatch.com/story/new-home-sales-soar-17-in-november-hit-an-8-month-high-2019-01-31