Given the remarkably constructive landscape investors find themselves immersed in, what could go wrong? In short, nothing that is evident. However, all of this week President Trump is in Asia visiting allies and trade partners as part of a twelve day trip. Presidential trips are meticulously planned with every contingency accounted for. They are also generally meant to underscore and confirm allegiances and opportunity. Any deviation from those goals may introduce a degree of volatility into the market. Another theme that may act as a headwind for further price gains in equities this week, aside from unexpectedly disappointing earnings results, may come as a result of any high hurdles for the tax reform legislation that investors are hoping will be enacted by year end. In my opinion, I think investors will ultimately find that meaningful tax reform legislation will take significantly longer to pass than two months, particularly, given how divided Washington and the nation are.
Last Friday’s monthly employment report for October, though constructive relative to the broader economic narrative, did disappoint. The initial top line gains in payrolls for the month were 261k, which fell short of consensus that was calling for 325k. Additionally, the Labor Force Participation Rate dipped to 62.7 from the previous month’s 63.1. Average Hourly Earnings both M/M and Y/Y also came in weaker than expected at 0.0% and 2.4%, respectively. Continued strength in manufacturing, upward revisions for September in that vertical, continued strength in the services sector, and solid gains in private payrolls were, however, enough to drop the unemployment rate to a very healthy 4.1%.
The disappointment in the report that continues to leave policy makers confounded is the lack of both consistent wage growth and the reversal in the recently improving Labor Force Participation Rate in the month. The nearly non-existent growth in wages in the month versus the previous two months of solid gains is frustrating–no question about it. Additionally, with the economy now at full-employment and with recent indications of modest tightening, the assumption made by most was that this employment report would finally provide the escape velocity for trend inflation that would unequivocally justify further tightening past December. That, honestly, was not the case.
In summary, it was still a solid report, particularly in light of the ancillary economic data we received last week. Personal Income and Outlays hit consensus at 0.4% and 1.0%. The PCE Price Index for the year, however, remains below target at 1.6%. The Dallas Fed Mfg. Survey was a much stronger than expected 27.6, Consumer Confidence jumped to a 17-year high of 125.9, the Employment Cost index hit consensus at 0.7%, and nearly every other data point for the month of October was either at or stronger than consensus.
US equities continued their relentless climb into record territory last week fueled in large part by the constructive narrative provided for by recent economic data, but more importantly, by corporate results, anticipation for movement on tax reform, and lack of clouds on the geopolitical horizon. Large cap technology has continued to reassert itself in the leadership position. Last Friday, Apple shares leapt 2.5% as a direct result of both earnings and guidance to close at a record high of $172.50 and with a market cap of $891B. Also providing enthusiasm for the shares has been very strong early indications of demand for its latest phone, the iPhone X. Some on the street were expecting the $1,000 price tag to negatively impact sales. However, early indications are that Apple has a winner on its hands (though, to be honest, I don’t get it). Also fueling the Nasdaq’s surge last week was the news of a potential deal between Qualcomm (QCOM) and Broadcom (AVGO). Other issues that outperformed to the upside last week as a result of quarterly results included Hortonworks (HDP), Arista Networks (ANET) and Carbonite (CARB).
The most recent results-driven run up in share prices that has materialized for investors has been remarkable in that it has been very broad. The large cap tech sector has reasserted itself, but strength in financials, healthcare, housing, defense, and bio-techs have also played an important role in keeping the advance balanced and healthy.
Crude oil last week added to recent gains by adding 2.75% or $1.49./bbl. This week’s EIA Petroleum Status Report should do little to undermine trend. According to Bloomberg, consensus is calling for a draw of 2.4M bbl of crude, 4M bbl of gasoline and 0.3M bbl of distillates.