For Investors, Two Days Remain in 2015 (Jobs, FOMC)

Although the calendar says 33 days to go before we ring in 2016, for investors, there are exactly two days left in 2015: Friday, December 4^th and Wednesday December 16^th. Oh sure, there will be navel gazing over the results of the holiday shopping weekend. FYI, as it turned out, those door busters were a bit of a bust in brick and mortar stores, but they sure were effective in the digital arena. ShopperTrak reported that in-store traffic was down, but Adobe Digital index said consumers spent 14 percent more on Black Friday than last year and Thanksgiving online spending saw a 22 percent surge.

Regardless of the total holiday sales results, which will not be available for another month, there are far more important events ahead for the economy. Back to those two days…on Friday, the government will release the November jobs report. After a better than expected reading in October, when the economy added 271,000 jobs, the unemployment rate edged down to 5 percent and average hourly earnings increased by 2.5 percent from the previous year, hopes are high for follow through in November.

Economists predict nonfarm payrolls will rise by 190,000, with a range of 160,000-220,000. The unemployment rate will likely hold steady at 5 percent and earnings growth should slow from the quicker than expected pace in October, but is expected to show continued progress. .

If the jobs report comes in even at the low end of predictions, it would probably be enough ammunition for the Federal Reserve to raise interest rates at its two-day meeting, which concludes on the last important day for investors, December 16^th. Janet Yellen will have two opportunities this week to pre-sell the rate hike: a speech before the Economic Club of Washington DC and testimony before the Joint Economic Committee of Congress. Although lawmakers will try to flex their muscles and attempt to prod Yellen to elaborate on the Fed’s plans, don’t expect her to give away much more than she has already stated in public.

Although these two days will be pivotal, that is not to say that there will not be volatile trading days in the month of December. As asset managers reposition their portfolios for the year-end, there is always the possibility for a low volume swing in either direction. There is also likely to be continued chatter about the narrowness of leadership in stocks. The FANG stocks (Facebook, Amazon, Netflix and Google) are said to account for gains of about 60 percent this year, while the S&P 500 and NASDAQ Composite are up 1.5 and 8.3 percent respectively.

MARKETS: While you were surfing the web on Black Friday, you may have missed a 5.5 percent drop in the Chinese stock market. The plunge was attributed to a government investigation into brokerage firms, which is part of a broader legal, regulatory and anti corruption crackdown, following a year of market swoons. Even with the late-week sell-off, the Shanghai Composite is 21 percent above its calendar year nadir on August 26^th, though still remains 34 percent below its seven-year high on June 12^th.

• DJIA: 17,798 down 0.1% on week, down 0.1% YTD
• S&P 500: 2,090 up 0.1% on week, up 1.5% YTD
• NASDAQ: 5,127 up 0.5% on week, up 8.3 % YTD
• Russell 2000: 1202, up 2.5% on week, down 0.2% YTD
• 10-Year Treasury yield: 2.22% (from 2.26% a week ago)
• Jan Crude: $41.71, down 0.6% on week
• Feb Gold: $1,056.20, down 1.3% on week (lowest level in more than five years, down 45% from peak 4 years ago)
• AAA Nat'l avg. for gallon of reg. gas: $2.05 (from $2.09 wk ago, $2.79 a year ago)

THE WEEK AHEAD:

Mon 11/30:

Cyber Monday

9:45 Chicago PMI

10:00 Pending Home Sales

10:30 Dallas Fed Manufacturing

Tues 12/1:

Giving Tuesday

Motor Vehicle Sales

9:45 PMI Manufacturing

10:00 ISM Manufacturing Index

10:00 Construction Spending

Weds 12/2:

8:15 ADP Private Employment Report

8:30 Productivity

2:00 Fed Beige Book

Fed Chair Janet Yellen speaks at the Economic Club of Washington DC

Thursday 12/3:

10:00 Factory Orders

10:00 ISM Non-Manufacturing Index

10:00 Fed Chair Janet Yellen testifies before Joint Economic Committee of Congress

Friday 12/4

8:30 November Employment Report

8:30 International Trade

Does Plunging Oil Portend Recession?

Crude oil has tumbled 15 percent in the past ten trading session, approaching the summertime low of nearly $40 a barrel. That means it’s time for one of the favorite economic themes of 2015: “Plunging demand for oil is the harbinger of a recession”. As recounted many times in this space, there has indeed been a drop off in activity in China and those emerging markets, which rely on trade with the world’s second largest economy. But surprisingly, as demand for oil has drifted down, supply has increased. That’s not supposed to happen, at least in the econ textbooks. You know how it works: demand weakens, prompting suppliers to cut back and then prices start to climb back up. But around the globe, production levels have remained robust. US, Russia, Saudi Arabia and other Persian Gulf states are keeping the spigots open, creating a glut of oil.

The good news is that gas prices have resumed a downward slide. AAA says that the average price for a gallon of regular gas is $2.18, down from $2.91 a year ago, with prices below $2 in many areas. AAA spokesman Avery Ash said “It looks increasingly likely that drivers will find the cheapest gas prices for both Thanksgiving and Christmas in seven years.”

Lest you think that Americans will use those savings at the pumps and beef up their holiday purchases, don’t bet on it. As gas prices have careened lower this year, there has been little evidence that consumers are spending it freely in the economy. Instead, they have been beefing up their cash reserves or saving for large purchases, like cars.

That parsimonious trend has been bad news for US economists, who have been hoping that our retail instincts would kick in and boost growth in the fourth quarter. It also may worrisome for the nation’s retailer’s, some of whom (Macy’s, Nordstrom) have been struggling, as the all-important holiday season is about to kick off.

But, wait…where’s that holiday optimism? OK, here it is: the last jobs report was really good, the service sector continues to advance and according to the Federal Reserve, “household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further.” That sounds pretty decent and not at all like a recession is imminent.

MARKETS: Investors broke a six-week winning streak in stocks, producing the largest percentage losses since the week ended August 21^st.

• DJIA: 17,245 down 3.7% on week, down 3.2% YTD
• S&P 500: 2,023 down 3.6% on week, down 1.7% YTD
• NASDAQ: 4,927 down 4.3% on week, up 4% YTD
• Russell 2000: 1146, down 4.4% on week, down 4.8% YTD
• 10-Year Treasury yield: 2.28% (from 2.32% a week ago)
• Dec Crude: $40.76, down 7.9% on week (biggest weekly loss in 7 months)
• Dec Gold: $1,080.90, down 0.6% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.18 (from $2.22 wk ago, $2.91 a year ago)

THE WEEK AHEAD:

Mon 11/16:

8:30 Empire State Manufacturing

Tues 11/17:

8:30 CPI

9:15 Industrial Production

10:00 Housing Market Index

Weds 11/18:

8:30 Housing Starts

2:00 FOMC Minutes

Weds 11/19:

10:00 Philly Fed

Weds 11/20:

Will OPEC Decision Halt the Santa Claus Rally?

While you were enjoying your Thanksgiving meal, the 12 members of the Organization of the Petroleum Exporting Countries (OPEC) announced that the cartel would hold its output target at 30 million barrels per day. The decision caused a steep sell off in Brent crude oil (the global benchmark) on the ICE Futures Europe. When U.S. markets opened on Friday, investors dumped West Texas Intermediate crude on the New York Mercantile Exchange and futures plunged 10.2 percent to $66.15 a barrel, the lowest settlement since September 2009. Both oil benchmarks are experiencing their worst losing streaks since the financial crisis in 2008, with 18 percent losses for the month of November. As previously mentioned in this space (Peak Oil Pukes), sinking oil and gas prices should help consumers, but the savings has not yet created overall cheer. Last week, the Conference Board said that its consumer confidence index dropped to a four month low in November. But Capital Economics notes “this fall needs to be taken into context alongside the sharp rise earlier in the year.” In fact, confidence is still close to seven-year highs.

What has been driving confidence this year has been the steady improvement in the jobs situation. Through October, the economy has added 2.225 million private sector jobs and 2.285 million total jobs in 2014. The November jobs report, which is due this Friday, is expected to show that the economy added 220,000 jobs. If that happens, 2014 will be the best year for private employment since 1999, according to Calculated Risk.

The unemployment rate is expected to remain at 5.8 percent, which puts it close to the Federal Reserve’s estimate of the longer-term, normal rate of unemployment of 5.2 percent to 5.5 percent. But with wages still up only 2 percent year over year, the central bank is likely to keep interest rates at 0 to 0.25 percent until next year.

Despite lots of energy and attention, the initial reports from retailers about the big holiday weekend may tell us less about the economy than the jobs report. Analysis from the New York Times found that while the holiday season is important for retailers, it “matters only a little bit” for the overall economy. The reason is clear: consumers would spend a certain amount of money in any two months. When stripping out the normal expenditures, “for the last two months of the year, Americans are on track to spend $106 billion more than they would if these were any old months.” Not that you would sneeze at $106 billion, but compared to the $17.6 trillion US economy, it’s not nearly as important as the elusive 3 percent increase in wages that we have seen in previous expansions.

MARKETS: Will investors be treated to a “Santa Claus Rally”? The old Wall Street chestnut predicts stocks do well during the period just after Thanksgiving through the end of the year. Over the past five years, the S&P 500 has gained an average of 2.5 percent during December. But OPEC's decision to maintain current production levels could weigh on energy stock prices, curtail energy company profits and limit the near-term upside in markets.

• DJIA: 17,828, up 0.1% on week, up 2.5% on month, up 7.6% YTD
• S&P 500: 2067, up 0.2% on week, up 2.5% on month, up 11.9% YTD
• NASDAQ: 4791, up 1.7% on week, up 3.5% on month, up 14.7% YTD
• Russell 2000: 1173, up 0.01% on week, up 2% on month, up 0.8% YTD
• 10-Year Treasury yield: 2.17% (from 2.31% a week ago)
• January Crude Oil: $66.15, down 13.5% on the week, down 18% on month
• December Gold: $1175.50, down 1.8% on the week
• AAA Nat'l average price for gallon of regular Gas: $2.78 (from $3.28 a year ago)

 THE WEEK AHEAD:

Mon 12/1:

Cyber Monday

9:45 PMI Manufacturing

10:00 ISM Manufacturing

Tues 12/2:

Motor Vehicle Sales (2014 is on pace to be the best year since 2006)

10:00 Construction Spending

Weds 12/3:

8:15 ADP Private Sector Employment Report

8:30 Productivity

10:00 ISM Non Manufacturing

2:00 Fed Beige Book

Thurs 12/4:

8:30 Weekly Jobless Claims

Fri 12/5:

8:30 November Employment Report

10:00 Factory Orders

3:00 Consumer Credit

Here Comes Holiday Season 2014

As the third quarter ends and investors tally returns, attention will once again return to the more mundane issues, like job creation, economic growth and of course, the all-important holiday season. Economists predict that companies stepped up the pace of hiring to 215,000 from the softer than expected August result of 142,000 and the unemployment rate is likely to remain at 6.1 percent. September numbers should be helped by the return to work of up to 25,000 workers at the New England grocery store Market Basket who walked out in late July. However, some of that effect will be offset by the recent closure of a number of large casinos in Atlantic City, which should reduce employment by 6,500. Regardless of these month-to-month fluctuations, the positive trend remains in tact. Most of the business surveys indicate that labor conditions have improved, households are saying that jobs are more plentiful and initial jobless claims are close to a 14-year low.

Despite the improvement in the labor market over the past year, the effects of the Great Recession are still impacting many Americans. According to a report from Rutgers University, more than 20 percent of those who were laid off over the past five years are still unemployed; and one in four who found work, is stuck in a temporary job. Of those who were lucky enough to land a new position, 46 percent say they had to take a pay cut and 44 percent reported a drop in status.

For those who kept their jobs, wages have remained largely flat and that may be due to the fact that many companies chose the more palatable option of freezing, rather than cutting wages during the recession. Because they did not lower wages during the downturn, employers have been slower to increase them as the economy has improved. The good news is that this condition can only last for so long. As the economy improves, the competition to attract and retain employees will increase and wages will rise.

If job creation and wage growth improve, that leaves one more area of concern for the labor market: the participation rate. Participation rate, or the number of American workers employed or actively seeking work, has been bumping along 35 year-lows of 63 percent, with no sign of picking up any time soon. Fed Chair Janet Yellen has noted that the low participation rate is one of the signs of “slack in the labor market”. Specifically, economists worry about the percentage of prime-working-age Americans, those between 25 and 54, who are in the labor force. As of this summer, the percentage fell to a 30-year low and for prime-working-age men, the number has dropped to the lowest reported since the government began computing the figure in 1948.

At issue is why all those people are not in the labor force. Research by the Cleveland Federal Reserve Bank attributes nearly half of the decline in participation since 2007 to aging, while 10 to 35 percent may be attributable to a weak labor market. That means that even if the labor market were to substantially improve, the participation rate may remain low over the longer-term, which the research defines as a decade. The research may mean that Fed policy makers may want to be careful about using a low participation rate as a rationale for keeping rates low.

Beyond jobs, the big focus as the economy enters the final quarter of the year will be consumers. The holiday season could turn out to be better than in the past if the job market and the economy gain steam. Last week, the first of the holiday sales predictions was released: Deloitte sees a sales increase of between 4 to 4.5 percent from November through January. That would be a modest improvement over last year's 2.8 percent gain to $944 billion, according to U.S. Commerce Department data that excludes auto and gasoline sales. But the mood and behavior of consumers has been mercurial throughout the recovery. Unless there is a consistent, positive change in conditions, any end of year euphoria may have to wait until 2015.

MARKETS: It was the worst week for stocks in nearly two months. Bears will point out that the Russell 2000 index of small stocks is close to correction territory (down 8.5% from the summer highs), while the bulls will note that the small and momentum stocks had similar movements lower in the spring, only to fake out investors by bouncing back swiftly.

• DJIA: 17,113 down 1% on week, up 3.2% YTD
• S&P 500: 1982, down 1.4% on week, up 7.3% YTD
• NASDAQ: 4512, down 1.5% on week, up 8% YTD
• 10-Year Treasury yield: 2.53% (from 2.58% a week ago)
• November Crude Oil: $93.54, up 2.1% on the week
• December Gold: $1215.40, down 0.1% on the week (lowest close since Dec 31, 2013)
• AAA Nat'l average price for gallon of regular Gas: $3.34 (from $3.42 a year ago) By the end of the year, up to 30 states could have an average gasoline price of less than $3/gallon, according to a recent GasBuddy forecast

THE WEEK AHEAD:

Mon 9/29:

8:30 Personal Income and Spending

10:00 Pending Home Sales

Tues 9/30:

9:00 Case Shiller Home Price Index

9:45 Chicago PMI

10:00 Consumer Confidence

Weds 10/1:

Automobile Sales

8:15 ADP Private Payrolls

9:45 PMI Manufacturing

10:00 ISM Manufacturing

10:00 Construction Spending

Thurs 10/2:

7:30 Challenger Job Cuts

8:30 Weekly Jobless Claims

10:00 Factory Orders

Fri 10/3:

8:30 Sep Employment Report

8:30 International Trade

9:45 PMI Service

10:00 ISM Non-Manufacturing

Week Ahead: Labor Market Has Work to Do

The US economy created far fewer jobs than expected in December – just 74,000, the smallest number since January 2011. The unemployment rate dropped to 6.7 percent, the lowest since October 2008, but the rate went down for the wrong reason - it was largely due to 347,000 would-be workers leaving the labor force. That pushed down the participation rate (the number of people actively looking for a job or employed) to a 35-year low of 62.8 percent. (As a point of reference, the participation was about 66-67 percent over the last 20 years. A large portion of the drop (as much as one-half to two-thirds) is attributable to demographics, i.e. Baby Boomers retiring). Considering that analysts were predicting 200,000 jobs created and that the participation would increase, you are not alone in asking, “What happened?”

Some economists noted that the big miss was due to unseasonably severe winter weather last month. The Bureau of Labor Statistics attempts to adjust its findings for seasonal factors. But since more snow fell than in a normal December, the adjustment may have lagged reality. The government’s household survey showed that 273,000 people reported not being able to work because of the weather in December, that’s well above the long-term average of 166,000 for the final month of each year. The folks at Capital Economics said, “It’s even possible that some people who couldn’t get to work were incorrectly recorded as unemployed rather than employed.”

Doubters contend that bad weather should not matter, because the government still counts workers as employed as long as they were paid for one day in the sample period, regardless of whether they turned up. Hard to say, but eyeballing the 16,000 decline in construction and the drop in average weekly hours worked, chances are that bad weather played some role. If that’s the case, then the next few months should show a pickup, as the chill from the Polar Vortex (and all other unnamed weather patterns) pass.

For now, the labor market still has work to do…

Now that the jobs report is behind us, it’s time for earnings season! Fourth quarter earnings for all S&P 500 companies are expected to rise by 6.1 percent, according to FactSet, compared to a 5.1 percent increase in the third quarter. Earnings estimates are down since September 30^th, with the energy sector seeing the largest cut. It’s the financial sector that is expected to lead the way, with earnings expected to rise by over 20 percent.

On the economic calendar, December retail sales will provide a closer look at the holiday shopping season. Last week, ShopperTrak said that sales were up 2.7 percent from a year ago in brick-and-mortar stores, despite a steep drop in traffic, which fell 14.6 percent. Separately, low-end retailers Dollar Stores and Sears reported that their customers continue to struggle economically and as a result; the holiday season was a bust.

MARKETS:

• DJIA: 16,437, down 0.2% on week, down 0.8% YTD
• S&P 500: 1842, up 0.6% on week, down 0.3% YTD
• NASDAQ: 4174, up 1% on week, down 0.05% YTD
• 10-Year Treasury yield: 2.86% (from 2.99% a week ago)
• Feb Crude Oil: $92.72
• Feb Gold: $1246.90
• AAA Nat'l average price for gallon of regular Gas: $3.31 (from $3.31 a year ago)

THE WEEK AHEAD:

Mon 1/13:

Tues 1/14:

JPMorgan Chase, Wells Fargo

8:30 Retail Sales

8:30 Import/Export Prices

10:00 Business Inventories

Weds 1/15:

Bank of America

8:30 PPI

8:30 Empire State Manufacturing

2:00 Fed Beige Book

Thurs 1/16:

American Express, Citigroup, Goldman Sachs, Intel

8:30 Weekly Jobless Claims

8:30 CPI

10:00 Philadelphia Fed

Fri 1/17:

GE, Morgan Stanley

8:30 Housing Starts

9:15 Industrial Production

9:55 Consumer Sentiment

10:00 Job Openings and Labor Turnover Survey (JOLTS)

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