U.S. stocks jumped Friday and the S&P 500 and Nasdaq closed at record highs after the October jobs report came in well above consensus expectations.TGIF Friday came with a bang this week as a much better-than-expected jobs report sent US stocks to record new highs.
The S&P 500 ended at 3,066.91, a record close, and just 0.04 points below the all-time intraday high it also reached during Friday’s session. The Nasdaq posted a record closing high of 8,386.4. And the Dow ended just 0.04% below its recent closing high from mid-July.Here’s where markets settled at the end of regular equity trading:Optimism over progress in a phase one U.S.-China trade deal added to sentiment. The Office of the U.S. Trade Representative said Friday that Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin held a “constructive call” with China’s Vice Premier Liu He about the first portion of a China trade deal, adding that “they made progress in a variety of areas and are in the process of resolving outstanding issues.”
- S&P 500 (^GSPC): +0.97%, or 29.34 points
- Dow (^DJI): +1.11%, or 300.31 points
- Nasdaq (^IXIC): +1.13%, or 94.04 points
- 10-year Treasury yield (^TNX): +2.8 bps to 1.719%
- Gold (GC=F): +0.06% to $1,515.70 per ounce
Earlier, the Bureau of Labor Statistics released its October jobs report Friday morning, showing the economy added 128,000 jobs for the month, well above the tepid 85,000 gains expected.
The unemployment rate edged up to 3.6%, as had been expected, increasingly just slightly from September’s 50-year low of 3.5% and reflecting a still-tight labor market. Hourly wages rose by 0.2% month-on-month, or just below the 0.3% gain expected, and 3.0% year-on-year, matching expectations.
“The strength of this report, together with the news earlier this week of a slightly stronger-than-expected 1.9% annualized gain in third-quarter GDP, would seem to support the Fed’s shift to a more neutral policy stance,” Michael Pearce, senior U.S. economist for Capital Economics, wrote in a note.
“Nevertheless, given the continuing weakness in the survey evidence – and with the knowledge that these employment figures are likely to be revised down significantly when the annual benchmark revision is incorporated early next year – the Fed may not be done yet, even though a December rate cut now look less likely,” he added.
Within October’s headline payrolls figure, manufacturing jobs fell by just 36,000, much better than the loss of 55,000 expected.
Consensus economists had anticipated job gains would soften for the month due primarily to the impact of transitory factors like the United Auto Workers strike on General Motors (GM).
The Labor Department has accounted for 46,000 striking GM workers. These were set to drag on manufacturing payrolls, but not have an impact on the unemployment rate and other measures in the household survey, which classifies striking workers as just temporarily unemployed.
But weaker manufacturing hiring trends have also reflected industry-specific softness, with a well-documented slowdown in goods-producing companies occurring both domestically and abroad amid an ongoing trade war and slowing business capital expenditures.
To this end, the October ISM manufacturing index also released Friday morning reflected the latest extent of the deceleration. The headline index held in contractionary territory for a third consecutive month, coming in at 48.3 versus the 48.9 expected. While this was an improvement from September’s 10-year low of 47.8, it was still below the neutral level of 50, indicating contraction.
Overseas, some signs of life emerged from the manufacturing sector of the world’s second largest economy. China’s Caixin manufacturing index unexpectedly increased to 51.7 from 51.4 in October, indicating expansion.
However, Caixin’s survey weighs private manufacturing companies more heavily, and the results were at odds with a report from the Chinese government Thursday that showed the country’s factory activity dropped to 49.3, the lowest level since February, as the trade war weighed on new export orders.
Elsewhere, earnings season continued to roll on with mixed results.
Newly public company Pinterest (PINS) disappointed investors with lower-than-expected quarterly sales and guidance, diverging from other internet companies including Google (GOOG), Facebook (FB) and Snap (SNAP) that had shown strong advertising sales growth. Shares tanked 20% in overnight trading.
China-based e-commerce giant Alibaba (BABA) topped consensus expectations and posted a 40% jump in revenue, as the firm’s improving shopping recommendations and a bump up in mobile users helped drive estimates-topping results.
In terms of employment gains, leisure and hospitality added the most positions at 61,000 jobs for the month of October, up from September’s 45,000, while manufacturing employment decreased by 36,000 last month as employment in motor vehicles and parts declined by 42,000, reflecting the GM strike activity.
The big story, however, were the big revisions that took place to previous months' reports. Along with the better-than-expected performance in October, previous months’ counts were revised considerably higher. August’s initial 168,000 estimate came all the way up to 219,000 while September’s jumped from 136,000 to 180,000.
There's no doubt the US economy is running on all cylinders but as I keep warning my readers, the unemployment rate is a lagging economic indicator and employment is generally classified as a coincident indicator (like GDP), so don't get too excited about the October jobs report which "smashed" expectations.
The October ISM report which does have leading economic indicators (New Orders) showed a contraction in manufacturing activity:
The report was issued today by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee: “The October PMI® registered 48.3 percent, an increase of 0.5 percentage point from the September reading of 47.8 percent. The New Orders Index registered 49.1 percent, an increase of 1.8 percentage points from the September reading of 47.3 percent. The Production Index registered 46.2 percent, down 1.1 percentage points compared to the September reading of 47.3 percent. The Backlog of Orders Index registered 44.1 percent, down 1 percentage point compared to the September reading of 45.1 percent. The Employment Index registered 47.7 percent, a 1.4-percentage point increase from the September reading of 46.3 percent. The Supplier Deliveries Index registered 49.5 percent, a 1.6-percentage point decrease from the September reading of 51.1 percent. The Inventories Index registered 48.9 percent, an increase of 2 percentage points from the September reading of 46.9 percent. The Prices Index registered 45.5 percent, a 4.2-percentage point decrease from the September reading of 49.7 percent. The New Export Orders Index registered 50.4 percent, a 9.4-percentage point increase from the September reading of 41 percent. The Imports Index registered 45.3 percent, a 2.8-percentage point decrease from the September reading of 48.1 percent.Even though the New Orders Index, a leading economic indicator, registered 49.1 percent, an increase of 1.8 percentage points, it's still contracting (below 50) but it was positive that it registered an increase.
I also noted the big jump in The New Export Orders Index, registering 50.4 percent, a 9.4-percentage point increase from the September reading of 41 percent. Maybe there is a pickup in overseas activity after all.
Not surprisingly, the yield on the 10-year Treasury note backed up by 4 basis points on Friday to 1.73% and prices on US long bonds (TLT) sold off a bit but remain above the 20-week moving average, which tells me the bond market isn't worried about a big rebound in economic activity yet:
Nonetheless, emerging market stocks (EEM) rallied hard on Friday in spite the continued strength in the US dollar (UUP) which is something worth tracking to see if there is any follow-through:
Any breakout in emerging markets will confirm that the Fed's rate cuts are starting to take hold there and if we see a pickup in global economic activity and global PMIs, this will put upward pressure on US long bond yields (downward pressure on prices). That's why it's important to track activity outside the US.
It's too early to tell what is going on right now but if the Fed sees a pickup in global economic activity, some good news on the ongoing trade dispute with China, it might pause and wait before cutting rates again.
As far as recession, the Fed seems to be ahead of the curve and according to the Maestro, it's too soon to be betting on a US recession:
Alan Greenspan says it’s too soon to start betting on a U.S. recession, according to one of his preferred gauges of American business spending.Greenspan is right, no recession began from a period of deleveraging and it's fair to say if there is a recession, it will turn out to be a soft landing as long as the Fed stays dovish.
While market-based signals and economist projections have shown rising odds that the expansion may stumble, the former Federal Reserve chief says history shows the economy isn’t sinking into a contraction.
That’s his conclusion based on a measure of how much companies are borrowing as they make decisions on investing in coming months. The ratio shows that on an aggregate basis, companies haven’t really resumed borrowing since the financial crisis.
“The economy has been weakening, but we’re still in a period of deleveraging,” Greenspan said in a recent interview. His office reaffirmed his outlook on Wednesday. “No recession in the last half century, at least, began from a period of deleveraging.”
Capital Investment
His conclusion is based on looking at capital investment on a six-month lag as a proxy for when companies decided to make the appropriations, then dividing that by cash flow. The approach shows that the amount of cash corporate boards choose to invest in long-term assets has been a “significant leading indicator” of capital spending, he says.
Specifically Greenspan pulls the underlying data from the Fed’s quarterly Financial Accounts of the U.S., a thick statistical publication also known as the Z.1 in the central bank’s nomenclature of reports.
The capital expenditure data are found in the section on nonfinancial corporate business, specifically capital expenditures minus changes in inventories divided by gross savings. That ratio hasn’t been greater than 1 since the end of 2007. The last recession started December of that year.
“I’m cautious about the long-term outlook, and we’re currently running under a 2% real GDP annual growth rate, but we nonetheless don’t appear to be sinking into recession despite the fact that economic growth has slowed significantly,” Greenspan said.
All this has been great news for stocks as the S&P 500 (SPY) continues to drive higher into record territory led by tech shares (XLK) which are up a whopping 36% year-to-date:
A big part of that tech performance (but definitely not all) is due to the huge run in Apple shares (AAPL) this year:
If I were a betting man, I'd say central banks followed Warren Buffett and snapped up a lot of Apple shares this year to prevent a meltdown (that's the conspiracy theorist in me).
Still, despite the Federal Reserve's decision on Wednesday to cut rates for the third time this year, sending stocks higher, several prominent market strategists see a big stock market selloff in the near future:
Peter Cecchini of Cantor Fitzgerald expects the S&P 500 Index to be at 2,500 by early 2020, a plunge of about 18% by early next year, Business Insider reports. He sees bearish manufacturing and consumer data, making a recession likely by the second half of 2020.Bearish sentiment and stock prices are both unusually high these days. That combination may be a sign of more market gains to come according to other market strategists.
Albert Edwards of Societe Generale notes that stock prices have been advancing faster than earnings, and he finds this to be reminiscent of thedotcom bubble. Meanwhile, interest rate cuts by the Fed appear to be losing their potency, The Wall Street Journal reports. One reason for this loss of potency is that investment in residential housing, a major beneficiary of cuts, has declined as a share of U.S. GDP. In addition, widespread uncertainties about global growth and trade tensions are making corporations hesitant to invest, even if they can borrow at lower rates.
Significance For Investors
"The unfolding profits recession will expose the 'growth' impostors and they will collapse, as they are on the wrong 'growth' PE valuations with the wrong EPS projections," Edwards said, as quoted in another BI article. "Just like in 2001, investors will not wait to distinguish true 'growth' stocks from the impostors. Investors will slam the whole sector and work it out later," he added.
While Cecchini sees a recession brewing in the manufacturing sector, he is not heartened, as are many other analysts, by consumer spending data and consumer confidence surveys that remain strong. He says that consumers typically keep spending until the onset of an economic downturn. "There's really not much room for improvement" in key indicators such as unemployment or consumer spending, he added.
"Lending standards are slowly beginning to tighten across the board," Cecchini noted, observing that consumer spending has been propped up by loose lending standards. Indeed, a large and increasing number of U.S. consumers are having difficulty paying their bills, including servicing their debt, per a survey by UBS.
Leading investment managers are also becoming increasingly bearish, per the latest release of the Big Money Poll conducted byBarron's. Among respondents, 31% are bearish on stocks, the highest level since the mid-1990s, while only 27% are bullish, less than half the proportion one year ago. Individual investors also polled by Barron's are similarly gloomy, with only 29% calling themselves bullish, and 42% believing that U.S. stocks are overvalued.
Meanwhile, corporate CEOs are registering their lowest levels of confidence since the 2008 financial crisis, and a majority of corporate CFOs expect the U.S. economy to be in recession by the second half of 2020, per two other recent surveys.
John Hussman, an investment manager and former professor, is another prominent bear. "Look, I expect the S&P 500 to lose somewhere between 50-65% over the completion of the current market cycle," he told BI in another report.
While Hussman is derided by some as a "perma-bear" for calling stocks overvalued and headed for a crash during much of the current decade-long bull market, he has had some notably correct bearish calls in the past. He predicted the dotcom crash of 2000 to 2002 and the bear market of 2007 to 2009.
Looking Ahead
Cecchini is most pessimistic about transportation and regional bank stocks. "Over the next three to six months, I'm relatively more constructive on REITs and utilities," particularly REITs that invest in commercial properties, he told BI. "Rates in the US are likely to tend towards zero over the intermediate to long run," he added. Cecchini advises investors in U.S. Treasury bonds to choose longer maturities, where rates are higher and under less downward pressure than short-term rates. He also is considerably more underweight on stocks than most other strategists.
As I explained last week, I don't see any stock market crash in the near term but there are plenty of reasons to stay on guard.
There are a lot of charts that scare Wall Street but the one I liked was something Kevin C. Smith, CEO of Crescat Capital, posted on LinkedIn:
Indeed, as stocks keep making record highs led by the tech sector, complacency sets in and that's when something bad tends to happen, catching everyone by surprise.
Of course, the other side of that argument is that if stocks keep making record highs, a lot of active managers underperforming their index start panicking and start buying the index going into year-end to reduce their tracking error. Never underestimate FOMO (fear of missing out) in momentum-driven markets.
However, I did note that value shares (VLUE) outperformed momentum shares (MTUM) on Friday and have been outperforming lately:
Is there a major shift going on out of momentum into value? There definitely is since Quant Quake 2.0 hit markets in September but it's too early to tell if this is a new sustainable trend out of momentum into value.
Below, Joe Terranova, senior managing director for Virtus Investment Partners, Kate Moore, head of thematic strategy at BlackRock's Global Allocation Investment team, Jason Furman, professor at Harvard's Kennedy School and former CEA chairman, Michael Strain, director of economic policy studies at the American Enterprise Institute, and CNBC's Steve Liesman join "Squawk Box" to give their initial reactions to the October jobs report.
And the S&P 500 and the Nasdaq Composite closed at a record high, gaining 1% and 1.1% respectively. Karen Finerman, CEO of Metropolitan Capital Advisors, Josh Brown, CEO of Ritholtz Wealth Management, and Joseph Quinlan, head of market strategy for Bank of America Private Bank, join CNBC's "Closing Bell" team.
Third, Tom Lee, Fundstrat Global Advisors, joins 'Fast Money Halftime Report' to discuss his outlook for earnings next year. Rob Sechan, UBS Private Wealth Management, and Jenny Harrington, Gilman Hill Asset Management CEO, join'Fast Money Halftime Report' to discuss.
Lastly, Marko Kolanovic, JP Morgan, discusses earnings, cyclicals and manufacturing. With CNBC's Melissa Lee and the Fast Money traders, Tim Seymour, Brian Kelly, Karen Finerman and Dan Nathan. If Kolanovic is right, cyclicals like energy shares should continue to rally hard while defensive sectors like utilities, REITs and consumer staples should sell off.