Market Perspective for July 8, 2016

Stocks pushed to all-time highs on Friday following a jobs report that exceeded expectations.

The Dow Jones Industrial Average finished the week above 18,100 points, while the S&P 500 Index breached its all-time high of 2125 to ultimately close at 2129.90. June’s jobs report alleviated labor market concerns that have loomed since May’s weak data. 287,000 new jobs were created last month, solidly ahead of the median forecast of 173,000. Another good sign from the report was the uptick in the unemployment rate to 4.9 percent. We expect to see a rising unemployment rate as the jobs market continues to strengthen because discouraged workers are not counted by the government statisticians as unemployed. As they start looking for work again, they will be added to the unemployment report.  Additionally, initial jobless claims fell by 16,000 last week to a nearly three-month low of 254,000.

Earlier in the week, markets were bolstered by positive action from the Bank of England (BoE). Citing uncertainty following the Brexit vote, the central bank relaxed regulatory requirements for banks and reduced capital requirements, raising the lending limit to ?150 billion. Elsewhere, the Royal Bank of Australia held interest rates steady at 1.75 percent; speculators are pricing in a possible rate cut next month.

The U.S. manufacturing and nonmanufacturing PMIs from the Institute of Supply Management (ISM) reached their highest levels in the past sixteen and seven months respectively. The latest Chinese Service Purchasing Managers Index (PMI) released Tuesday reported to be 50, signaling the midpoint between expansion and contraction. UK services’ PMI fell to 53.5, but still remaining in expansionary territory.

The U.S. trade balance expanded to $41.1 billion in May as exports declined. Although weekly crude oil inventory fell and the report also indicated a reduction in domestic production, ample gasoline supplies might dent demand going forward. The price of oil dropped nearly $4 on the week, to $45.12 per barrel.

On Thursday, PepsiCo (PEP) delivered better-than-expected EPS of $1.38 and revenues of $2.01 billion. Pepsi also raised its forecast for the year, based on strong sales in North America. Shares of the company rose on the news and extended the rally in to Friday. Walgreens (WBA) reported earnings per share of $1.18 on revenues of $29.5 billion. Profits increased by 14.7 percent versus year-ago levels, but revenues missed estimates. Despite the strong earnings, investors focused on the revenue miss, and shares of WBA fell in the wake of the report.

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