Stock rally continues in the face of weak jobs report

Initially, markets were not impressed with Friday’s jobs report, which showed only 142,000 net new jobs created in the U.S. nonfarm economy during August. That rate of job creation fell short of Street expectations of around 225,000 and went against the run of recent economic data – e.g., auto sales hitting an eight-year high and ISM purchasing managers’ indexes at multi-year highs in August.

After 6 straight months of job growth exceeding 200,000, August’s shortfall may well have been anomalous, running counter even to other, stronger indications within Friday’s Labor Department report. Aggregate hours worked in the private nonfarm economy reached a record high last month, 2.2% above the August 2013 level; and average hourly earnings for production workers increased 0.3% in August and 2.5% over the past 12 months, the best year-on-year rate of wage growth in almost 4 years. So perhaps today’s job numbers were not so bad after all.

Considering how deep the 2008-09 recession in jobs was, we tend to agree with Fed Chair Janet Yellen’s assessment that there is still substantial slack in the U.S. labor market. Stock market bulls appear to have reached the conclusion that, if the labor market is not quite as strong as the February-to-July reports seemed to suggest, then the Federal Reserve will stay on the side of growth that much longer than if job growth were accelerating and wage growth represented a threat to the Fed’s 2% inflation target.

In any event, stock market bulls won the day Friday, propelling the Dow Jones Industrial Average up 68 points or 0.4% to within one point of its all-time peak. In other words, had any one of the Dow’s 30 members ticked one-eighth of a point higher at the close, the price-weighted Dow index would have finished right on the record high hit in mid-July. The S&P 500, among the leading global stock market indexes all year, did manage to close Friday at a new peak, up 0.5% for the day and 8.6% higher for the year to date. NASDAQ also gained 0.5% Friday and is up 9.7% so far in 2014. The gains in U.S. stock market indexes were slight for the week, ranging from a skimpy two basis points for the S&P 600 SmallCaps to 0.2% for the Dow and S&P 500 big-cap indexes.

Europe’s stock markets enjoyed bigger gains this past week, in large part as a result of the European Central Bank’s interest rate reductions and its plans to purchase a modest amount of asset backed securities in the market. Stock prices failed to extend their mid-week gains on Friday, but nonetheless closed the week up from 2.4% (France) to 4.6% (Italy), with the apparent truce/ceasefire agreement between Ukraine and Russian-backed rebels also a factor in higher European stock quotes. The euro ticked up a bit on Friday but ended the week down 1.4% at what was essentially its lowest level ($1.2950) in 14 months.

The dollar also gained 0.9% against the yen this past week, ending at the 105 yen-to-the-dollar exchange rate. Japanese share prices ended the week with a gain of 1.6% on the Nikkei 225 scale. But Shanghai was Asia’s star performer for the week, gaining each day for a total advance of 4.9% for the week, boosting its YTD advance to almost 10%. India’s Sensex index extended its league-leading YTD increase to 28% with a 1.5% gain this past week.

Finally, in the U.S. bond market, for perhaps the first time in a while, an economic disappointment – admittedly only Friday’s modest shortfall in the payroll jobs report – sent yields higher. The 10-year Treasury note yield initially moved lower when the jobs numbers were reported at 8:30 ET Friday, but by the close it was up to 2.46%, 11 basis points higher on the week. Contrast this with the Spain 10-year note yield, which closed the week down 19 bps at 2.04%, 40 bps below the 10-year Treasury; at the end of 2012, it was nearly 350 bps higher. Is it any wonder the Spanish government sold 50-year sovereign bonds in a private placement this past week?

Reports/dates/facts/links to watch for over the next week:

  • September 9: U.S. JOLTS Job Openings report (July); same store sales latest week.
  • September 10: U.S. wholesale trade (July)
  • September 11: U.S. weekly jobless claims; U.S. Treasury monthly statement (August).
  • September 12: U.S. retail sales (September); UofM/Reuters consumer sentiment report (mid-September). China industrial production (August).

Copyright © 2014 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.

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Senior Vice President – Investment Research/Economist
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