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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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The Week In Review

3/4/16

The stock market ended an upbeat week on a wobbly note. The S&P 500 added 0.3% after being up 0.8% going into the late afternoon. Despite the late slip from session highs, the benchmark index still registered its third consecutive weekly advance, climbing 2.7% since last Friday.

 

Today's session featured something for fans of symmetry as stocks started and ended the trading day on a shaky note. The volatile action occurred in the wake of a February Employment Situation Report that left participants wondering what to make of it. On one hand, the report pointed to strong headline growth in payrolls (242,000; Briefing.com consensus 190,000), but on the other hand, average hourly earnings decreased 0.1% (Briefing.com consensus 0.2%), dropping the annualized earnings growth rate to 2.2% year-over-year from 2.5% that was observed in January. This puts the rate back in a lackluster range that has held for years and has negative implications for consumer spending.

 

That view likely bolstered the market's belief that a surprise rate hike in March is off the table, inviting an intraday rally in stocks. However, this argument gets a bit fuzzier when taking into account today's upward revision to Atlanta Fed's GDPNow forecast for the first quarter, which was raised to 2.2% from 1.9% on March 1. The Atlanta Fed pointed to an increase in expectations for real consumer spending growth (to +3.3% from +3.1%) as the main reason for the improved outlook.

 

Furthermore, shortly after the jobs report was released, the fed funds futures market saw a shift in the belly of the expectations curve, briefly signaling a 50.1% chance of a rate hike at the September meeting. The curve receded a bit since the morning with the market, at day's end, expecting a 52.0% chance of a hike in November and a 48.9% chance of a move in September. On Monday, the fed funds futures market saw December as the first month entering into the rate hike conversation with the probability of a hike at the corresponding policy meeting running at 54.4%.

 

Interestingly, the afternoon slide that cut the market's gain in half occurred near the 100-day moving average (1999.8) in the S&P 500 as the index tried to register its first close above that mark since December 31. The benchmark average settled just above that level (by 0.18!) after spiking off its 50-day moving average (1940.5) on Tuesday.

 

Seven sectors ended the day with gains, paced by materials (+1.2%), utilities (+1.2%), energy (+0.9%), and financials (+0.4%). On the flip side, health care (-0.2%) and consumer discretionary (UNCH) lagged throughout the day while technology (+0.4%) ended just ahead of the broader market as relative strength in chipmakers helped mask some weakness among select top-weighted components. Alphabet (GOOGL 730.22, -1.37), Microsoft (MSFT 52.03, -0.32), and Facebook (FB 108.39, -1.19) lost between 0.2% and 1.1% while the PHLX Semiconductor Index (+1.1%) outperformed after Wells Fargo upgraded the chipmaker sector to 'Overweight.'

 

On the earnings front, SOX index component Broadcom (AVGO 146.06, +8.73) surged 6.4% in reaction to better than expected results.

 

The Friday advance in equities was accompanied by selling in the Treasury market. The 10-yr note ended off its low with its yield up five basis points at 1.88% after testing the 1.90% mark. Today's volatility invited increased volume as more than 1.35 billion shares changed hands at the NYSE floor.

 

Economic data included the Employment Situation Report and Trade Balance:

 

Nonfarm payrolls increased by 242,000 (Briefing.com consensus 190,000) and Private sector payrolls increased by 230,000 (Briefing.com consensus 180,000)

January nonfarm payrolls revised to 172,000 from 151,000 and January private sector payrolls revised to 182,000 from 158,000

Unemployment rate was 4.9% (Briefing.com consensus 4.9%) versus 4.9% in January

The U6 unemployment rate, which accounts for the total unemployed plus persons marginally attached to the labor force and the underemployed, was 9.7% versus 9.9% in January

Persons unemployed for 27 weeks or more accounted for 27.7% of the unemployed versus 26.9% in January

January average hourly earnings were down 0.1% (Briefing.com consensus 0.2%) after being up 0.5% in January

Over the last 12 months, average hourly earnings have risen 2.2% versus 2.5% in January

The average workweek declined 0.2 to 34.4 hours (Briefing.com consensus 34.6)

February manufacturing workweek was unchanged at 40.8 hours

Factory overtime was 3.3 hours for the third month in a row

The labor force participation rate was 62.9% versus 62.7% in January

The January Trade Balance report showed a widening in the deficit to $45.7 billion (Briefing.com consensus -$44.0 bln) from a downwardly revised deficit of $44.7 billion (from -$43.4 bln) for December

Exports were down $3.8 billion from December while imports were down $2.8 billion.

Monday's data will be limited to the 15:00 ET release of the January Consumer Credit report (Briefing.com consensus $16.50 billion).

 

S&P 500 -2.2% YTD

Dow Jones Industrial Average -2.4% YTD

Russell 2000 -4.8% YTD

Nasdaq -5.8% YTD

Week in Review: Three in a Row

The stock market enjoyed its third consecutive week of gains that put the S&P 500 back above its 100-day moving average (1999.8) for the first time since late December. The benchmark index spiked 2.7% for the week, extending its three-week run to 7.3% while the Nasdaq outperformed, climbing 2.8% this week and 8.8% over the past three weeks.

U.S. equity indices soared alongside their counterparts in Japan (+5.2%), Hong Kong (+4.2%), China (+3.9%), Germany (+3.3%), and France (+3.3%) during what was a bit of a peculiar week. Specifically, the week started amid rising stimulus hopes after disappointing manufacturing data from China reinforced expectations for a global slowdown, but as the week continued, the attitude went from "worse than expected" to "better than feared," essentially leaving a bad-is-good (more stimulus) and good-is-good (more growth) dynamic in place. This idea was on full display on Friday when investors received a February Employment Situation Report, which showed a surprising divergence. Namely, nonfarm payrolls increased by a healthy 242,000 (Briefing.com consensus 190,000) with upward revisions to January and December, but February average hourly earnings were down 0.1% (Briefing.com consensus 0.2%) after being up 0.5% in January.

At first glance, the decline in average hourly earnings should be viewed as something that may detract the Fed from raising rates sooner than expected due to negative implications to consumer spending—and that is likely the message the market received and rallied behind on Friday. However, that did not stop the Atlanta Fed from revising its GDPNow first quarter GDP forecast up to 2.2% from 1.9% and specifically citing a larger contribution from real consumer spending growth (+3.3% from +3.1%) for the revision.

This could explain why, on Friday morning, the belly of the expectations curve of the fed funds futures market briefly signaled a 50.1% chance of a rate hike at the September meeting. The curve receded a bit since the morning with the market now expecting a 52.0% chance of a hike in November and a 48.9% chance of a move in September. On Monday, the fed funds futures market saw December as the next month entering into the rate hike conversation with the probability of a hike at the corresponding policy meeting running at 54.4%.