After a midday stumble, stocks finished strongly on Friday despite a weaker-than-expected payroll report. Investors were pleased by the ceasefire agreement in Ukraine between Kiev and pro-Russian separatists.
In the end, the Dow Jones Industrial Average gained 0.4%, the S&P 500 gained 0.5% to retake the 2,000 level (which it’s been oscillating around for two weeks), the Nasdaq gained 0.5%, and the Russell 2000 gained 0.3%.
The day had a definite defensive feel, with utility stocks leading the way thanks to an early strong rally in Treasury bonds, rising 1.2% as a group. Energy also moved higher despite weakness in crude oil prices. Financials underperformed.
And it was a tough day for board short makers and retailers, with Quiksilver (ZQK) down 25% on an unexpected Q2 loss and flat operating earnings on a 10% revenue shortfall while Zumiez (ZUMZ) lost more than 8% on an analyst downgrade and pessimism about same-store sales growth.
Click to Enlarge Breadth weakened, as investors have lost a little interest in stocks as the S&P 500 has tread water near the 2000 mark. The percentage of S&P 500 stocks in uptrends dropped slightly to 75%, down from nearly 77% earlier in the week and a peak of nearly 85% aback in July.
Also, the percentage of New York Stock Exchange stocks above their 50-day moving average is down to just 61% (shown above) — off of the high of 65% last week and a peak of nearly 85% when the market was last making new highs in late July.
Fewer and fewer stocks are holding the S&P 500 near 2000.
Options traders also are getting nervous, with the CBOE put-to-call equity ratio turning higher in a way that I haven’t seen since the market was topping in late June ahead of the late July selloff. That’s something to keep in mind since this represents real money buying of put options that profit when stock prices decline.
Now, about that jobs report.
Wall Street was disappointed with the August jobs report on Friday morning, which featured the weakest payroll gains of the year. Expectations were high heading into the report, given that we’ve seen the best pace of job creation since the 1990s. Over the last five months, the economy has added 243,000 jobs per month. Compare that to last month’s result of just 142,000.
Moreover, the unemployment rate dropped back to 6.1% from 6.2% previously. A drop like that would normally be good news, but it’s being driven by folks dropping out of the workforce … and that’s bad.
But digging deeper into the details of the report, two silver linings emerged.
Yes, the headline payroll gain is the smallest we’ve seen since January’s 113,000 result (which has since been revised to 144,000). But analysts are quick to look past the weak result since over the past few years, payroll gains have suffered an odd dip in August and September. According to Philippa Dunne at the Liscio Report, this was largely due to a data collection problem in the education sector near the start of the school year.
As a result, I expect the number to be moved higher toward 180,000 when it’s all said and done.
The second (and I believe more important) takeaway is that the details of the report contained more evidence of a tightening in the job market that, if it continues, will support higher wage inflation in the months to come.
The drop in the unemployment rate to date has been driven by short-term unemployed finding work. What remains in the available pool of labor, as economists like to call job seekers, are those that have been out of work for awhile. This is a less easily assimilated group of workers, since many have seen skills atrophy or were trained in industries that are no longer in demand.
Currently, wage inflation for production and nonsupervisory employees is growing at a 2.5 percent annual rate. A three percent rate would be considered more normal. At the current pace, we should see that within the next nine months according to Gluskin Sheff economist David Rosenberg.
If so, it’ll be great news for regular families and in turn, will support the economy through higher retail sales, increased home prices and less reliance on debt.
As for stocks, unless breadth improves and participation widens, prices could come under pressure next week.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.
