Market Perspective for August 5, 2016

A superb jobs report rallied the market to end the week on a high note. 255,000 new jobs were created in July, far surpassing the 185,000 predicted. Unemployment held steady at 4.9 percent and wages also increased 0.3 percent from the month earlier, faster than expectations. Strong employment data increased the Atlanta Federal Reserve’s GDP Now model its third quarter GDP growth forecast to 3.8 percent. Economists are conservatively forecasting around 2.4 percent growth.

Friday’s labor reports pushed stocks out of their three-week trading range and on to new all-time highs, despite subdued trading earlier in the week.  For the week, the S&P 500 gained 0.4 percent and the Nasdaq rallied 1.1 percent. The Nasdaq returned 0.6 percent.

Pharmaceutical giants dominated this week’s earnings reports. Shares of Pfizer (PFE) fell as the company reported a 23 percent drop in profits, citing lower demand for some of its older prescription medications. The world’s largest generic drug manufacturer Teva Pharmaceutical (TEVA) beat market expectations in earnings per share (EPS) and revenues. Shares rallied on the news, but pulled back when Teva announced its purchase of Anda, the generic drug distribution division of Allergan (AGN) for $500 million. Bristol-Myers (BMY) has yet to report, though shares plunged double-digits following news that its Opdivo cancer drug, used to treat several different forms of cancer, failed in a lung cancer trial. BMY’s loss was Merck’s (MRK) gain as its competing drug Keytruda targets the same market. Shares of MRK were up as much as 8 percent during the day.

The record-shattering release of the “Overwatch” video game helped Activision Blizzard (ATVI) handily beat expectations. 3D Systems (DDD) also easily beat analysts’ forecasts as demand for its software and medical solutions far outpaced estimates. Chesapeake Energy (CHK) fell 3 percent following poor earnings and a planned $800 million increase in asset sales. Proctor & Gamble (PG) reported EPS of $0.74, beating expectations. Shares saw a small gain on the week.

Chinese and U.S. manufacturing Purchasing Managers Index (PMI) for July came in less than forecast. Light vehicle sales for July rose 6.5 percent over the previous month, to an annualized sales pace of 17.9 million. If this pace can hold, it could be a record year for auto sales. The weekly mortgage application index showed a 3.5 percent decline as interest rates moved higher. On Thursday, the weekly unemployment claims number was slightly higher than expectations at 269,000. Consumer spending was up 0.4 percent in June, in line with expectations and matching the prior month’s growth. Oil prices fell below $40 early in the week and rebounded late. A surprise decline in inventory caused a spike in prices, but some oil market analysts claim this was due to inventory shipping to a new storage facility.

Overseas, India enacted a new Goods and Services Tax (GST) designed to replace the incongruent mix of local and state taxes. It is a major step forward for Prime Minister Modi’s reform agenda both economically and politically, as it required a constitutional amendment to pass. Estimates vary, but one HSBC report believes the new law will boost long-term GDP growth by 0.80 percentage points each year. In Japan, the government approved another stimulus plan totaling $73 billion in hopes of jump-starting that nation’s sluggish economy. The program includes infrastructure projects, asset purchases and direct payments to low-income families. A new cabinet member also proposed wage targeting as a way to generate inflation, sparking concern from investors.

The Royal Bank of Australia cut its key interest rate to a record low 1.5 percent. As anticipated, the Bank of England (BoE) also cut interest rates to help the UK economy and allay uncertainty over Brexit. In addition to lowering rates to 0.25 percent, the BoE restarted its quantitative easing program with a plan to purchase corporate bonds.

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