August 4, 2017

Stocks opened higher after the monthly jobs report. The Dow is up 20 pts and the SPX is up .15%. Financials, tech and materials are leading the way. And as you would expect on a day when interest rates rise, utilities, telecom and consumer staples are falling behind. The VIX Index is back down under 10 today, and European stock markets are poised to close up 1%+. The dollar is sharply higher, also due to the jobs report. And crude oil is trying to make another run toward $50/barrel. Bonds are modestly lower in price as yield tick higher. The 10-year Treasury yield is sitting at 2.28%. I don’t want to make too much of this; remember, the 10-year yield is right in the middle of its trading range going back several months. 

The economy generated a net new 209,000 jobs in July. That brings the monthly average of new jobs in 2017 to about 184,000. Certain sectors saw especially strong hiring activity, such as restaurants, professional services, and healthcare. The unemployment rate fell to 4.3% (the lowest since 2001) and the under-employment rate (“U-6”) held steady at 8.6% (the lowest since late 2007). The labor force participation rate ticked up slightly to 62.9%, which is encouraging. Meanwhile, the average workweek held at 34.5 hours and wage growth held at 2.5% from year-ago levels. This is a very positive report, again confirming strength in the labor market and suggesting consumers are in good shape and will continue to spend. If there is anything a bit strange in the report details, it is that wage growth isn’t yet accelerating. Without rising wage growth and inflation expectations, it’s tough for the Federal Reserve to make the case for continued interest rate hikes.   

Hedge fund manager Jim Paulsen, who called the synchronized global economic recovery more than a year ago, said today that the stock market rally is in great shape. “The recovery has broadened out to all corners of the globe.” He noted a strong job market, strong consumer & business confidence, and better corporate earnings. If these positive trends can continue without “aggravating inflation and interest rates,” he believes “the bull market can continue forever.” So he sees stocks rising until interest rates begin a sustained acceleration. So today’s employment report is sort of a Goldilocks scenario in which economic activity is strong but wage growth isn’t rising. 

Aetna (AET) reported second quarter results that pleasantly surprised investors. The company’s total revenue fell 3% y/y but earnings per share shot up 55% y/y. One big reason why Aetna was able to deliver such a large earnings beat: less ObamaCare exposure. The insurer is pulling out of state-run exchanges because they aren’t profitable. The stock climbed 2.5% immediately after the announcement, and is up another 1.5% today.    

Orbital ATK (OA) reported quarterly revenue slightly above expectations (up 6% y/y) and earnings per share came in significantly above forecasts (up 16%). Management also raised 2017 full-year earnings guidance above Wall Street forecasts. The stock was up 2.7% immediately after the announcement and is up over 20% so far this year. 
 


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