It’s a marathon. Stocks slid on Friday after bad guidance from Apple, trade fears, and a strong economic number. Wait, “did he just say STRONG economic number” you ask. I sure did, but more on that in a bit. Apple released earnings after the close on Thursday and, as reported in my Friday’s note, their 4th quarter guidance was anything but pleasant. I am sure I don’t have to remind you that 4Q is the code word for: “holiday season” and if Apple, the retail technology behemoth, is expecting soft sales in that important quarter it is not a good thing. Apple fell -6.63% pulling down techs and weighing on the S&P and NASDAQ, both of which are heavily weighted on the stock. But wait, a light of hope in a Presidential tweet came after the close on Thursday as well. The President had a pleasant phone call with Chinese President Xi. The tweet, as intended, sprayed a positive feel on the market, which took it as a positive sign of an agreement later this month at the group of 20 meeting. Stocks opened in the green despite the Apple news and it appeared that markets would extend their already impressive rally from earlier in the week. But then came Larry Kudlow, the Whitehouse’s chief economic advisor, with a big bucket of ice. In a CNBC interview he quashed all rumors that something new was afoot in the trade talks between the US and China. Cue the selling. The President’s wealth advisor must have called him and told him that the markets were roiled and trading down on Kudlow’s comments. The President took the first opportunity he could find to tell reporters that a great deal would come out of talks with China! Well that helped pull the markets off of their lows of the day but the S&P still closed down -0.63%, the Dow closed off -0.43%, the NASDAQ 100 gave up -1.47%, while the Russell 2000 managed closing up +0.19%. All of the indexes managed to close up on the week. Bonds, well they were reading from a completely different score.
As promised, I want to quickly highlight Friday’s important monthly employment situation. Though we were expecting an additional 200k jobs to be added, the number actually reflected a growth of 250k new non-farm jobs. The unemployment rate came in right on the numbers, flat at 3.7%. Average hourly earnings came in at +3.1% up from last month’s +2.8%. Wow, now those are good numbers for the economy. Low unemployment, new jobs being added, and wage growth. But wait, is that good news or bad news? It certainly is good news for the President, the economy, and workers who are desperate for pay raises. Not so much for employers who are paying more and incurring more expenses. Remember low unemployment with increasing job growth and lots of job openings (see JOLTS number later this week) means a tight labor market, and that means inflation. Remember it all starts with wages, which represents a large chunk of corporate expense. As expenses go up, rational companies (an economic term) will raise prices to maintain margins. Rational consumers who make more money will buy more stuff, increasing demand… well that raises prices as well. So now you know and so does the Fed, who is watching for signs of inflation. Friday’s number adds to the Federal Reserve’s case for another rate hike in December. You don’t believe me? Check out Friday’s bond market (see charts 19 and 20 in my attached daily chartbook). Bonds generally go up as stocks go down, but on Friday bonds went down along with stocks. Ten year yields soared from 3.14% to as high as 3.22% by the close. They have since eased back a bit and will start the week at 3.2%. So for those that feared a rate hike in December, Friday’s number was no comfort. The FOMC will meet this week and is not expected to take any action, but December’s meeting carries a 77.5% probability of a hike. Expect lots more discussion on that in this week’s news cycle.
Today, we get Services PMI (expecting 54.6 versus 54.7 prior) and ISM non-manufacturing Index (expecting 59.1 versus last months 61.6). Non-manufacturing means services, and as that represents a large chunk of the US GDP, this is an important number. The week ahead is packed with a variety of other important numbers on mortgages, consumer credit, job openings, and the producer price index. We have another big week of earnings releases starting with only a few before the markets open today. Refer to the attached economic and earnings calendar for specifics. Tomorrow, we get the results of the mid term elections which will certainly add plenty of speculation and volatility to the markets. You may or may not have noticed the word “volatility” seems to find its way into almost every one of my recent notes, but I am sure that you have noticed that your portfolio value seems to be all over the place lately and in this upcoming week you must remember that investing is not a sprint but a marathon
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