The equity market stumbled on Friday following anomalous employment data, a drop in oil and sluggish earnings. 151,000 new jobs were added in January, missing a projected 180,000. Investors reacted poorly to that number, though economists believe a drop to 4.9 percent unemployment and hourly wage increases are more indicative of a healthy economy. Unseasonably warm weather in much of the U.S. may also jumpstart seasonal employment. Home Depot has already announced it will hire 80,000 in the spring.
The price of crude oil fell almost 12 percent on Tuesday and Wednesday and dipped again on Friday as many drillers are continuing to produce in hopes they can wait out the market. China weighed on global markets as the country’s official factory PMI survey missed its forecast. New York Federal Reserve President Bill Dudley spoke on Wednesday, stating the Fed made a policy error in raising rates and that a strong dollar would have negative consequences, inciting a brief near-3 percent rally into Thursday’s market. Many traders interpreted Dudley’s dovish comments as a sign that the Fed would not raise interest rates again this year. Dudley’s comments coincided with the Bank of England and the Reserve Bank of Australia maintaining their accommodative policies by holding interest rates unchanged.
The Personal Income and Outlays report met the consensus estimate of a 0.3 percent increase in income, but consumer spending declined an unexpected 0.1 percent as people saved the extra cash. The ISM Manufacturing Index for January came in at 0.2 percent, narrowly missing 0.3 percent growth estimates. On Wednesday, the ISM nonmanufacturing index, although still showing expansion, produced a reading of 53.5 versus a 55.1 consensus estimate. ISM’s New Orders Index, however, indicated expansion at 51.5, 2.7 percent ahead of December. New orders were prominent in wood products, furniture, appliances and electrical equipment and may hint at housing market growth. Thursday’s initial weekly jobless claims were slightly higher than estimates. The same day, the Labor Department also reported that nonfarm productivity dropped during the fourth quarter at its quickest pace in over a year. Auto sales were also much stronger than expected in January.
Mixed earnings also contributed to the market’s volatility as emotional investors continued to greatly reward and severely punish firms who either beat or missed expectations. On Monday, Alphabet (GOOGL), the parent of Google, reported earnings per share of $8.67 and revenues of $21.33 billion, which easily beat estimates. GOOGL surged on the news, enabling it to overtake Apple as the most valuable company in the stock market. Exxon Mobil Corp. (XOM) reported a 58 percent decline in earnings due to low oil prices. While the stock was initially down on the news, the firm did beat earnings estimates and XOM rallied more than 3 percent later in the week as the price of oil recovered. Pfizer’s earnings topped estimates as the company reported strong sales in a number of its key drugs. Merck (MRK) beat EPS estimates as well. Both PFE and MRK rallied on Friday despite the broader market moving lower. LinkedIn (LNKD) beat earnings estimates, but issued lower guidance, sending shares down 40 percent. The move dragged the Internet sector and the Nasdaq along for the ride.
The price per barrel of West Texas Intermediate (WTI) crude increased from its Wednesday low of $29.40 to a high of $33.50 Thursday, only to fall well below $32 again on Friday. Gasoline prices also fell as a result of increased inventories. The 10-year treasury yield fell to 1.86 percent on the rally in treasuries, but investment grade and high yield bonds declined slightly.
Dividend-paying shares held up very well with this week’s falling interest rates. Some dividend funds even finished the week with a gain and nearly all outperformed the broader market. Dividend-paying shares have outperformed throughout 2016, aided by sharply lower 5-year and 10-year treasury yields. Utilities have rallied nearly 7 percent in less than two weeks as rate hike expectations faded, though in the very unlikely event of a March rate hike we could see a short-term relative correction. Speculators do not expect a March rate hike at the moment, placing the odds at 10 percent, but they did lift the possibility of rate hikes later this year following Friday’s employment data.