After a jobs report that was better under the surface than at the headline level, we head into the first week of earnings season with the markets rattling off new records like it’s 2017 all over again.
The year looks like it’s off to a fine start. Nearly every sector aside from some of the so-called “defensive” ones performed well during the first week of January, and all the major indices spent day after day setting new all-time highs. While this had some market professionals shaking their heads and talking about possible over-bought conditions, Wall Street analysts at some of the big banks continue to predict a relatively strong 2018, though few look for a repeat of the 20% S&P 500 (SPX) gains posted in 2017.
Speaking of big banks, earnings get started late this coming week and major banking companies form the vanguard. The action commences Friday morning with Q4 results from JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co. (NYSE: WFC). Things get really exciting the following week when earnings season really hits full steam.
Financial stocks have had a nice run over the last few months, buoyed by investor optimism about tax cuts, economic growth, and rising interest rates. Heading into earnings season, the financial sector is expected to report 11.7% earnings growth and 2.3% revenue growth on a year-over-year basis, according to FactSet. At the industry level, insurance and consumer finance are projected to report the highest earnings growth.
Though Friday’s December jobs report wasn’t necessarily a blowout, it was generally pretty good. In fact, one could argue that some of the numbers, particularly the 0.3% wage growth, fell into what might be called the “Goldilocks” range. That means strong enough to reflect some economic gains that could help consumers, but not so strong that it would necessarily alarm the Fed.
The futures market now shows about 67% odds of a rate hike in March, with odds not exceeding 50% for a second 2018 rate hike until September. The Fed has forecast three rate hikes this year, and nothing in the jobs report appeared to change that metric.
The jobs that were created in December were “career-type” jobs in places like construction and manufacturing. This is sometimes considered a sign that the economy continues to head in the right direction.
One odd thing about the report, as we noted in Friday’s column, was the weak retail sector jobs growth seen in December of just 20,000 positions. Announcements last week of more store closures just reinforced the stress this industry is under, though many retail shares have rallied over the last few weeks amid the Christmas rush.
One more thought about non-farm payrolls: Disappointing headline numbers like Friday’s could become more common as the economy approaches full employment, Briefing.com pointed out. That’s something to consider ahead of future reports. With unemployment still at nearly 20-year lows, it might start getting more difficult for companies to find new workers. Some manufacturing firms are even beginning to offer financial incentives to attract employees, CNBC reported Friday. With that in mind, traders might have to start adjusting expectations of how many new positions the economy can add in the months to come.
Getting back to this coming week, data include consumer price and producer price indices (CPI and PPI), along with the monthly Jobs Openings and Labor Turnover Survey (JOLTS) report. The JOLTS data are due Wednesday, followed by PPI on Thursday and CPI on Friday. The one to keep a close watch on is CPI, which ticked up 0.4% overall but just 0.1% on a core basis in November. Core CPI rose just 1.7% year-over-year in November, and that’s one reason, perhaps, why inflation fears remain rather muted. We’ll find out Friday if there’s any reason to consider adjusting that view.
FIGURE 1: IN SYNC. Both the S&P 500 Index (candlestick chart) and the Nasdaq (purple line) have tracked pretty much in sync over the last month as the two major indices continue to post record highs. Both indices recently punched through key milestones at 2,700 for the SPX and 7,000 for the Nasdaq. Data source: Nasdaq, Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Where the New Jobs Came From in 2017
The economy added more than 2 million jobs in 2017, and some of the best jobs growth for the year came in categories that tend to reflect a strong economy, including construction, mining, manufacturing, financial activities, and health care. For instance, on a seasonally adjusted basis, the economy saw more than 200,000 new jobs in construction, another 200,000 jobs added in manufacturing, 130,000 in financial activities, 500,000 in professional and business services, and 300,000 in health care, the Bureau of Labor Statistics said.
Other areas of strong growth included leisure and hospitality — which might mean people are spending more money going to sporting events and museums — and with mining and logging. On the other side of things, a couple areas saw positions fall in 2017, including retail and the federal government. Department stores and general merchandise stores both had fewer positions at the end of 2017 than at the end of 2016, perhaps a sign of the times.
Will M&A Be Announced at Health Care Conference?
This coming week features the annual JP Morgan Healthcare Conference, which runs Monday through Thursday. While the conference gives investors a chance to hear straight from health and biotech companies about trends in their businesses, it sometimes also has been a platform where mergers and acquisitions (M&A) get announced, Bloomberg News points out, so keep an ear open for possible M&A news. Last year wasn’t a particularly big one from an M&A front, but it’s possible M&A could get some wind at its back due to the tax reform that just took effect. Big firms in health care and other industries that have a chance to repatriate some of their foreign profits might use some of that money to become more acquisitive.
While commodity markets cooled off a little early Friday, they’ve been on quite a tear lately. Much of the focus has been on crude oil and gold, both of which climbed steadily in late December and early January amid growing demand for oil and inflation fears that helped gold, but other commodity markets also drew buyers. Notably, copper — sometimes seen as a derivative of broader industrial demand — recently posted nearly two-year highs. Still, not all commodity markets rallied. Those mainstays of the Chicago futures markets — corn, wheat, and soybeans — have all struggled lately. In fact, corn futures at the Chicago Board of Trade haven’t recorded an annual price increase since 2012. The question is whether this might change in 2018, as corn acreage is expected to fall due to the depressed prices.
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