Weekly Markets Commentary — January 9, 2017
David Joy – Chief Market Strategist, Ameriprise Financial
Headwinds Remain as the Economy Gains Momentum
Somewhat lost in the focus on what the new administration is likely to do has been the underlying momentum in the economy. Last week provided further evidence that growth remains healthy, headlined by the December jobs report. The economy created 156,000 new jobs, and the prior two-months were revised higher by 19,000. Job growth in 2016 followed something of a saw tooth pattern. In the first quarter, monthly job growth averaged 195,000, but slowed in the second quarter to 146,000. It rebounded in the third to 212,000, before subsequently slowing in the fourth quarter to 165,000.
The 180,000 monthly averages for the full year was a solid performance by the labor market, especially this late in the recovery with the unemployment rate at 4.7 percent and some slowdown in the pace of job growth expected. In a research paper published by the San Francisco Federal Reserve last October, entitled “Trend Job Growth: Where’s Normal?” Bidder, Mahedi and Valletta conclude that the economy now needs to create only somewhere between 50,000 and 110,000 new jobs to maintain a healthy labor market.
The December jobs report also showed average hourly wages rising 2.9 percent year-over-year, the highest reading since June, 2009. The underemployment rate continued its downward trend and at 9.2 percent is its lowest since April, 2008. And weekly jobless claims fell sharply last week. The manufacturing sector also showed strength. The ISM manufacturing report for December rose to its highest in two years, propelled by a surge in new orders. That was followed last week by the service sector report that stayed at its highest level in just over a year. Motor vehicle sales defied expectations and rose to their highest in eleven years. Construction spending climbed to its best level since the summer.
Markets React Favorably to Strong Economic News, but Headwinds Remain
Bond yields rose sharply following the jobs report on Friday. After reaching a recent high of 2.60 percent on Dec. 15, the yield on the ten-year note had fallen to 2.35 percent at Thursday’s close. However, it climbed back to 2.42 percent following release of the jobs report. The dollar traced a similar pattern, while stocks rose to new highs. The S&P 500 ended the week at a new record high at 2,277, up 1.7 percent in the first week of trading in the New Year. The Dow came within a fraction of the 20,000 threshold before falling back slightly.
Although the economy is solid right now, some are warning of headwinds that are beginning to emerge. They warn that higher rates are a drag on housing, that the stronger dollar is a drag on exports and that wage gains are being eroded by rising inflation. And, they point out, that strong vehicle sales relied increasingly on incentives. Some business groups, such as the National Association for Business Economics and the National Federation of Independent Business are warning of a skilled labor shortage that threatens to impede the recovery.
What to Watch in the Week Ahead?
In the week ahead, the December retail sales report will provide the latest look at economic conditions. But last week’s focus on the economy will give way to this week’s focus on fourth quarter earnings, which are expected to grow by 3.0 percent according to Factset. Of particular interest will be results among the banks, which begin reporting on Friday with Bank of America, JP Morgan chase and Wells Fargo. The overall financial sector is expected to deliver earnings growth of 13.8 percent, according to Factset.
Since the election, the XLF financial sector ETF is higher by 17.8 percent, well ahead of the 6.4 percent gain in the S&P 500. Over that same time, the KBW bank index is up 23.5 percent. This week’s reports will reveal whether the surge in bank stocks is deserved based on results, or whether it remains mostly anticipatory in the hope of sustainably better economic conditions and reduced regulatory oversight.
Also this week, Senate hearings begin for President-elect Trump’s cabinet nominees, including Attorney General, and Secretaries of State, Education, Commerce and Labor. And the President-elect is scheduled to hold a press conference on Wednesday.