January 7, 2019
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ECONOMIC SUMMARY
There were 312,000 new jobs added in December, but the unemployment rate rose 0.2 percentage point to 3.9%. Job gains occurred in health care, food services and drinking places, construction, manufacturing, and retail trade. The number of unemployed persons increased by 276,000 to 6.3 million. Comparatively, the unemployment rate was 4.1% and the number of unemployed was 6.6 million in December 2017. The labor force participation rate was 63.1%, and the employment-population ratio was 60.6% for the third consecutive month. The average workweek increased by 0.1 hour to 34.5 hours in December. Average hourly earnings rose $0.11 to $27.48. Over the year, average hourly earnings have increased by $0.84, or 3.2%.
Purchasing managers noted a drop-off in confidence among manufacturers in December, with the degree of optimism dipping to the lowest point since October 2016. The IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 53.8 in December, down from 55.3 in November. Overall, manufacturers’ optimism and production fell to their lowest respective levels in 15 months. Job creation sputtered to an 18-month low.
For the week ended December 29, there were 231,000 new claims for unemployment insurance, an increase of 10,000 from the previous week’s level, which was revised up by 5,000. According to the Department of Labor, the advance rate for insured unemployment claims remained at 1.2% for the week ended December 22. The advance number of those receiving unemployment insurance benefits during the week ended December 22 was 1,740,000, an increase of 32,000 from the prior week’s level, which was revised up by 7,000.
MARKET RETURNS
DJIA: 23,433.16, up 1.61%
Nasdaq: 6,738.86, up 2.34%
S&P 500: 2,531.94, up 1.86%
Russell 2000: 1,380.75, up 3.20%
Global Dow: 2,772.41, up 1.99%
Fed. Funds: 2.25% -2.50%, unchanged
10-year Treasuries: 2.66%, down 5 bps
MARKET SUMMARY
Stocks rose for a second consecutive week, although markets remained extremely volatile. The smaller-cap benchmarks, which typically see larger swings, performed the best after suffering the biggest declines in 2018 — the worst overall year for stocks in a decade. The gains left only the small-cap Russell 2000 Index in bear market territory, down roughly 21% from its recent high. Markets were closed Tuesday for the New Year’s Day holiday.
Within the S&P 500 Index, energy shares were especially strong, supported by a rebound in oil prices. Communication services shares also outperformed, helped by both a solid rise in Netflix and gains in the shares of traditional telecommunications firms, whose dividends have become more appealing following the recent drop in bond yields. Technology stocks underperformed, hurt by a sharp drop in Apple’s stock on Thursday. Health care stocks also underperformed as uncertainty lingered over the future of the Affordable Care Act and the potential for legislation regulating drug prices to be introduced in the new Congress. The week brought news of Bristol-Myers Squibb’s plans to acquire cancer drugmaker Celgene in what would be the biggest deal in biopharmaceutical industry history. Celgene shares shot up over 20% on the news, while Bristol-Myers Squibb shares tumbled over 13%.
The week started off on a positive note, helped in part by hopeful signs in the ongoing U.S.-China trade dispute. President Trump tweeted over the weekend that he and President Xi Jinping had made “big progress” in trade talks, sending shares higher when trading opened Monday. Trading was relatively light in advance of the holiday, however, and some weak economic data out of China might have limited the gains (see below). Indeed, worries about China sent the indexes sharply lower when trading reopened Wednesday, according to traders, although the market rallied in the afternoon and closed modestly higher.
After the market’s close on Wednesday, Apple CEO Tim Cook warned investors in a letter that the company was lowering its quarterly revenue guidance — the first such cut in 15 years. Apple shares tumbled nearly 10% on Thursday in response, dragging the large-cap indexes lower. Cook’s letter also soured sentiment broadly because he blamed slowing iPhone demand in China, which he attributed in turn to economic weakness resulting from the trade battle with the U.S. Yet some critics suggested that Apple’s strategy in China might be to blame, with Chinese consumers favoring other, more affordable smartphones.
The week’s economic data also played a major role in moving markets. Thursday’s sell-off appeared partly due to a sharp decline in the Institute for Supply Management (ISM) Purchasing Managers’ Index, particularly the ISM’s gauge of new order activity. The decline followed recent disappointing data on durable goods orders and seemed to confirm a substantial slowdown in business investment late in 2018. Markets jumped on much better news on Friday. The Labor Department reported that employers had added 312,000 nonfarm jobs in December (see above), while weaker showings in previous months were revised upward. Average hourly earnings also increased at an impressive rate.
Stocks got a further boost Friday from reassurances offered by Federal Reserve Chairman Jerome Powell. Taking questions at an economic conference, Powell stressed that the Fed would deepen its focus on economic conditions in 2019 and would not hesitate to respond with all the tools at its disposal to counteract an economic downturn or financial turmoil. Powell also stressed that, while the downturn in the ISM manufacturing survey bore watching, hard economic data remained generally sound.
Despite surging Friday in response to Powell’s comments and the payrolls report, Treasury yields ended the week lower as investors sought out safe-haven assets in the wake of continued volatility in equity markets and geopolitical uncertainty. (Bond prices and yields move in opposite directions.) The municipal market followed the rally in Treasuries, and with the start of the new issuance calendar due the following week, most activity occurred in the secondary market. The rally extended throughout the week, with longer-maturity bonds outperforming their shorter-maturity counterparts.
Trading activity in the investment-grade corporate bond market picked up as the week progressed, and new issuance exceeded modest expectations. As the week began, traders observed that investors seemed to be waiting to gauge the market’s reaction to new issuance after 2018 ended with a relatively quiet two-week period. Evidence provided by the week’s few deals proved mixed — some of the new deals were well received, while others saw little demand. Financial issuers are expected to drive new supply in January, with early estimates calling for $100 billion to $125 billion of total volume.
The high yield market began the week with a generally positive tone. The market saw moderate buying activity, which helped the asset class hold up better than equities, and overall trade volumes were light. Energy bonds traded higher as oil prices posted consecutive daily gains due to OPEC production cuts, news of falling U.S. inventories, and the prospect of easing tensions between the U.S. and China.
After a bearish start, the pan-European STOXX Europe 600 Index gained ground and was up about 2% for the week, buoyed by prospects of fresh U.S.-Chinese trade talks. On Thursday, however, European shares were caught in the global sell-off triggered by Apple’s sales projection downgrade, which reinforced expectations that a global economic slowdown is underway. For the week, Germany’s DAX Index rose about 2%, France’s CAC-40 Index was up about 1%, and the UK’s FTSE Index was up about 1.5%.
The Nikkei 225 Stock Average fell 2.3% for the holiday-shortened trading week and closed on Friday at 19,561.96. (The Tokyo Stock Exchange was closed for the New Year’s holiday on Monday through Thursday.) The broad-based, large-cap TOPIX Index and the TOPIX Small Index recorded less severe losses on Friday, declining 1.5% and 1.4%, respectively. At the close of trading on Friday, the yen stood at ¥108.48 per U.S. dollar, versus over ¥113 per dollar in mid-December.
Mainland Chinese markets advanced in a holiday-shortened week, and the country’s central bank stepped in with more targeted stimulus measures after a mixed batch of indicators pointed to a deepening economic slowdown. For the week, the Shanghai Composite Index and the large-cap CSI 300 Index, China’s blue chip benchmark, each advanced 0.8%.
Portions of the preceding information are reprinted with permission from Broadridge Investor Communication Solutions, Inc. Copyright 2019. Portions of the preceding information are shared from T. Rowe Price Weekly Market Wrap-Up.