November 3, 2017

Stocks opened mixed this morning (Dow & SPX flat; Nasdaq +.3%). Biotechs, utilities, retailers and consumer staples stocks are faring well in early trading. And select names like Apple (AAPL) are up after reporting earnings. But gold miners, banks, REITs, and materials stocks are in the red. We got a raft of economic data, much of which was positive. The VIX Index backed down to 9.7, which suggests a continued low volatility environment for equities. Commodities are mostly lower but WTI crude oil is hanging in there at $54.50/barrel. Bonds are trading modestly lower. The 5-year and 10-year Treasury yields edged up to 2.02% and 2.36%, respectively. 

Apple (AAPL) reported excellent third quarter results yesterday afternoon. The company reported 12% sales growth and 24% earnings growth. Apple sold more iPhones than expected and even though the average selling price dipped to $618, the company’s gross profit margin surprised to the upside. In addition, orders for the new iPhone X were characterized as “very strong.” The quarter saw strength across geographies and product lines. CEO Tim Cook expects the holiday season to be Apple’s “biggest quarter ever.” 

According to the Bureau of Labor Statistics, the US economy generated 261,000 new jobs in October. That’s a pretty strong number but not even close to the 313,000 anticipated by economists. It’s not clear why the experts were so far off the mark, except that there were some hurricane-related distortions. Overall, the report paints a very positive picture of labor market conditions. Revisions to August and September data added another 90,000 jobs. The unemployment rate fell to 4.1% (lowest since 2000) and the under-employment rate fell to 7.9% (lowest in 11 years). Despite hurricane impact—which was less than anticipated—the average workweek held steady at 34.4 hours. These days, the jobs report is scrutinized by investors (and the Fed) for signs of accelerating wage inflation. We got the opposite.  Average hourly earnings growth decelerated to 2.4% from year-ago levels and September wage growth was revised down to 2.8%. It has been suggested that perhaps lower-wage workers in leisure and hospitality returned to work after the hurricanes and brought down the average.  

ISM’s non-manufacturing business activity survey surged in October to 60.1, the highest reading since 2005. Non-manufacturing includes construction, which surged due to post-hurricane rebuilding efforts. So this report probably over-states strength in the service sector, but we have seen improving business activity for over a year now. 

Orders for new factory goods also came in better than expected in October. Factory orders increased 1.4% from prior month levels. Orders for durable goods—meant to last more than 3 years—rose 2.0%. Digging deeper into the details, it is clear that businesses are investing for future growth. New orders for capital goods excluding defense equipment and aircraft rose 7.7% from year-ago levels. That’s the highest growth rate since May 2012.  

The economy is clearly improving. CNBC’s Rapid Update model predicts US economic growth will hit 2.8% in the fourth quarter. The Atlanta Federal Reserve’s GDPNow economic growth forecast is now 3.3%. And I’d point out that Citigroup’s US Economic Surprise Index has surged to +41 from -79 back in June. That means on balance economic data have been much better than expected of late. 

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