Strong Jobs Report Aids in Equity Advance

Charles Schwab: On the Market

Posted: 8/4/2017 4:15 PM ET

Strong Jobs Report Aids in Equity Advance

U.S. stocks advanced on the heels of the release of the July nonfarm payroll report that showed strong job growth, a dip in the unemployment rate and a rise in hourly wages. Financials led the ascent as Treasury yields also gained ground, while gold was lower and the U.S. dollar and crude oil prices advanced. In equity news, a host of earnings reports flooded the Street and market participants continued to evaluate the lingering political uncertainty.

The Dow Jones Industrial Average (DJIA) gained 67 points (0.3%) to 22,093, the S&P 500 Index added 5 points (0.2%) to 2,477, and the Nasdaq Composite ticked 11 points (0.2%) higher at 6,352. In moderate volume, 785 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.55 to $49.58 per barrel and wholesale gasoline was $0.02 higher at $1.65 per gallon. Elsewhere, the Bloomberg gold spot price was $9.45 lower at $1,259.16 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—traded 0.7% higher at 93.47.

Kraft Heinz Co. (KHC $87) reported Q2 earnings-per-share (EPS) of $0.94, or $0.98 ex-items, compared to the $0.95 FactSet estimate, with revenues declining 1.7% year-over-year (y/y) to $6.7 billion, roughly in line with expectations. Separately, the company raised its quarterly dividend by 4.2% to $0.625 per share. KHC traded modestly higher.

Viacom Inc. (VIAB $30) posted fiscal Q3 EPS of $1.69, or $1.17 ex-items, versus the projected $1.05, as revenues rose 8.0% y/y to $3.4 billion, above the expected $3.3 billion. Shares fell despite the results as the company offered a disappointing Q4 outlook for cable-TV networks subscribers and domestic advertising revenue.

Cigna Corp. (CI $173) announced Q2 profits of $3.15 per share, or $2.91 ex-items, compared to the expected $2.48, with revenues rising 4.0% y/y to $10.3 billion, roughly in line with forecasts. CI raised its full-year EPS outlook and reaffirmed its revenue guidance. Shares traded lower as the insurer was the last of the big companies in the industry to post results, which were upbeat to bolster the group's sharp rally that began in Q4 of 2016.

Activision Blizzard Inc. (ATVI $62) reported Q2 EPS of $0.32, or $0.43 ex-items, versus the projected $0.30, on revenues of $1.4 billion, above the estimated $1.2 billion. ATVI issued Q3 EPS guidance that was below forecasts, and raised its full-year earnings outlook though it remained south of expectations. Shares closed solidly lower.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article,  Big Time: An Update on Our U.S. Large Cap Bias, that most secular trends point to large cap outperformance; but there are risks to the story. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Automatic Data Processing Inc. (ADP $111) announced that activist investor Bill Ackman's Pershing Square Capital Management is seeking control of the company through five Board seats as well as a CEO change. Pershing is seeking this as it requested an extension of ADP's August 10 deadline for the nomination of directors. The company said that its Board has determined that it is not in the best interests of ADP or its other shareholders to accede to Pershing Square's last-minute request for an extension. ADP closed slightly lower, though initially shares were modestly higher after last week's pop on reports that Ackman built a stake in the company, while CNBC said today that Bill Ackman told the news outlet that he does not want to have a proxy fight and plans to propose a minority slate for the Board.

Yelp Inc. (YELP $40) surged after announcing a long-term partnership with Grubhub Inc. (GRUB $53), including the sale of its Eat24 business to GRUB for about $288 million in cash and the integration of online ordering from all Grubhub restaurants onto its local goods and services platform. YELP also received a boost from its stronger-than-expected Q2 earnings report, which included an increased full-year outlook and a share repurchase program. GRUB rallied as well.

July nonfarm jobs report tops forecasts, trade deficit narrows

Nonfarm payrolls (chart) rose by 209,000 jobs month-over-month (m/m) in July, compared to the Bloomberg forecast of a 180,000 increase. The rise of 222,000 seen in June was revised to a gain of 231,000 jobs. The total upward revision to the job gains in June and May was 2,000. Excluding government hiring and firing, private sector payrolls increased by 205,000, versus the forecasted gain of 180,000, after increasing by 194,000 in June, revised from the 187,000 rise that was initially reported.

The unemployment rate dipped to 4.3% from 4.4%, matching forecasts, while average hourly earnings rose 0.3% m/m, in line with projections and versus June's unrevised 0.2% increase. Y/Y, wage gains were 2.5%, matching June's pace and versus estimates of a 2.4% rise. Finally, average weekly hours remained at June's unrevised 34.5 rate, matching expectations.

Job gains were broad-based, led by gains in food services and drinking places, professional and business services, and health care. The unemployment rate dipped back to May's 16-year low and the labor force participation rate ticked higher to 62.9% from 62.8%. The wage growth rounded out the trifecta, likely preserving expectations of one more Fed rate hike this year, even as the Central Bank begins the process of reducing its gargantuan balance sheet.

The tight labor market, including the pick-up in wage growth, is a major pillar in our outperform ratings for the financials and technology sectors, as discussed by Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, in his just updated Schwab Sector Views: Time to "Energize" Your Portfolio?.

Moreover, Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article, Fed Keeps it on the QT, that the Central Bank pointed to a September start point to balance sheet shrinkage, or quantitative tightening (QT), and we do believe another rate hike later in the year is in the cards. However, next up is the Jackson Hole annual conference later this month, which could provide an opportunity to further steer the consensus around QT's timing. There is a September timing risk however, given that we could be in the midst of a debt ceiling stand-off, so stay tuned. Read these articles on the Markets & Economy page at www.schwab.com and follow us and Liz Ann on Twitter: @schwabresearch and @lizannsonders.

The trade balance (chart) showed that the deficit came in at $43.6 billion in June, compared to estimates of $44.5 billion. May's deficit was downwardly revised at $46.4 billion. Exports rose 1.2% m/m to $194.4 billion, while imports ticked 0.2% higher to $238.0 billion.

Treasuries fell, with the yield on the 2-year note rising 1 basis point (bp) to 1.35% and the yields on the 10-year note and the 30-year bond gaining 4 bps to 2.26% and 2.84%, respectively.

Treasury yields showed some relative signs of life and the U.S. Dollar Index rebounded from lows not seen since May 2016 on the employment data. Schwab's Chief Fixed Income Strategist Kathy Jones offers a look at the bond markets and the greenback in her articles, Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer' on the Fixed Income page at www.schwab.com, and, Dollar Decline: Time to Shift to International Bonds? Maybe Not, on the Markets & Economy page. Follow Kathy on Twitter: @kathyjones.

The political front remains in focus and a source of uncertainty with constant changes in the White House and as another attempt at health care reform failed recently as discussed in Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's article, Health Care Reform: What Investors Should Know, on the Insights & Ideas page at www.schwab.com.

Europe higher on data, Asia finished mixed ahead of U.S. jobs report release

European equities moved to the upside, with the euro and British pound dropping versus the U.S. dollar in the wake of the upbeat U.S. July nonfarm payroll report, which helped offset exacerbated political concerns in the world's largest economy. Also, the markets digested a plethora of mixed earnings reports which hamstrung insurance companies. In economic news, German factory orders rose more than expected in June, while U.K. new car registrations fell in July. Bond yields in the region finished mostly higher. For a look at global investing, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives, Randy Frederick's video, Why Add Foreign Stocks to Your Portfolio?, on the Insights & Ideas page at www.schwab.com. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick.

Stocks in Asia finished mixed amid a flood of earnings reports and some apparent caution toward the U.S. ahead of today's July employment report and as political uneasiness was exacerbated by reports that the Russia investigation was intensifying. Japanese equities declined as the yen gained ground and a report showed the nation's wages unexpectedly fell. Mainland Chinese shares declined, while stocks in Hong Kong ticked higher in choppy action as some earnings results in the region came in mixed. Australian securities decreased with financial shares finding pressure after regulators sued a lender they allege failed to report potential money laundering transactions properly. Traders also digested the Reserve Bank of Australia's monetary policy statement, which showed the central bank was a bit more optimistic about economic growth.

South Korean equities rose to rebound somewhat from yesterday's drop from all-time highs that came in the wake of this week's tax reform plan that included tax hikes on corporations and individuals. Indian stocks advanced to remain near record highs. Schwab's Jeffrey Kleintop CFA, offers his article, The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over on the International Investing page at www.schwab.com, where you can also find his 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks.

Stocks mixed on data and uncertainties

Stocks posted another mixed week as the global markets grappled with festering political and geopolitical concerns, along with lingering global monetary policy uncertainty, which continued to stymie the U.S. dollar. Earnings season continued with upbeat results from Apple Inc. (AAPL $156) helping to bolster the Dow to record highs and above the 22,000 mark for the first time. Energy issues lagged amid pressure on commodity-related issues, a dip in crude oil prices, and as earnings from the sector were scrutinized against lofty expectations. Thus far, of the 419 members of the S&P 500 that have reported results, about 68% have topped sales forecasts and roughly 77% have bested earnings estimates, with energy the lone major sector running at a negative earnings surprise rate, per data compiled by Bloomberg. The technology sector continued to face volatility amid valuation concerns, which hamstrung the Nasdaq. Financials continued to run, aided by Friday's rally in Treasury yields on the strong July nonfarm payroll report, which also helped the U.S. Dollar Index bounce off May 2016 lows. Leading up to the jobs report, however, data was mixed as monthly auto sales and the ISM non-Manufacturing Index raised some concerns, offsetting another solid read in the ISM Manufacturing Index, which joined similar reads out of the sector in Europe and Asia.

Next week, the economic calendar will begin to regain some of the markets attention as earnings season winds down, headlined by the releases of the Producer Price Index (PPI) and the Consumer Price Index (CPI). Inflation is the other side of the Fed's dual mandate and has remained subdued to foster some uncertainty regarding if the Central Bank has one more rate hike in it this year. The PPI and CPI will be accompanied by the releases of the NFIB Small Business Optimism Index, preliminary Q2 nonfarm productivity and unit labor costs, and the JOLTS Job Openings report.

As noted in the latest Schwab Market Perspective: Things are Looking Good … But are They Too Good?, earnings season has been solid and equity indexes continue to set record highs. The bull market should continue but the risk of a "melt-up" appears to be rising. The U.S. economy is growing modestly and the Federal Reserve is maintaining its slow pace of policy normalization—both supports for further equity market gains, but geopolitical risk remains elevated. While the weaker U.S. dollar is a benefit for U.S. companies, there is a downside internationally … but it may not be where you think. Read more on the Markets & Economy page at www.schwab.com.

International reports to look out for next week include: Australia—consumer confidence. China—trade balance and CPI and PPI. Japan—trade balance and machine orders. Eurozone—investor confidence, along with German industrial production, trade balance and CPI. U.K.—trade balance and industrial/manufacturing production.