U.S. equities could hardly be bothered by Friday’s surprisingly strong jobs report, featuring a decline in the unemployment rate to a new post-recession low of 4.6%. Payrolls expanded by 178,000, above the consensus and the 142,000 created in October.
Yet the major averages were little changed in quiet trading as investors brace for the upcoming Federal Reserve policy decision on Dec. 14, widely expected to feature another interest rate hike.
In the end, the Dow Jones Industrial Average lost 0.1%, the S&P 500 gained a fraction, the Nasdaq Composite gained 0.1%, and the Russell 2000 gained a fraction. Treasury bonds were stronger, the dollar was mostly weaker, gold gained 0.7%, and oil gained 1.2% to continue its post-OPEC strength. That boosted the ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO) 2.8% to bring its total gain to 25% since recommended to Edge subscribers on Nov. 15.
Yield-sensitive stocks enjoyed a reprieve, with REITs up 1.1% and utilities up 0.9% to lead the day. Financials took a breather, down 0.9%. Pandora Media Inc (NYSE:P) gained nearly 17% after CNBC reported the company could be open to engaging with takeover talks with Sirius XM Holdings Inc (NASDAQ:SIRI). J C Penney Company Inc (NYSE:JCP) gained 2.9% after being upgraded to buy from neutral at Bank of America Merrill Lynch.
On the downside, Starbucks Corporation (NASDAQ:SBUX) fell 2.2% on news last night that longtime CEO and founder Howard Schultz would step down to focus on the company’s high-end Reserve roastery concept as executive chairman.
Back to the jobs numbers. There was some concern the drop in the unemployment rate was largely driven by a 226,000 drop in the civilian labor force — an ongoing drop in labor participation driven by demographics. Average hourly earnings also slid 0.1%, the first month-over-month decline since December 2015. Still, on a year-over-year basis, earnings climbed about 2.5%.
Capital Economics believes the report overall reinforced the idea the economy is approaching full employment, increasing the risk further economic gains will boost inflation more rapidly than we’ve seen in the recovery to date. That’s part of the reason bonds have been hammered lately — pushing interest rates higher — as everyone considers what President-elect Trump’s aggressive fiscal stimulus plans will mean for growth and the overall price level.
As a result, not only do they expect the Fed to raise rates later this month — for a total of 0.5% of hikes since the tightening campaign started late last year — but they are looking for another 1.0% worth of hikes next year.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Two- and four-week trial offers have been extended to InvestorPlace readers.
