Market Update: Thursday, September 1, 2016

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  • Stocks look to bounce back, follow Europe higher. U.S. equities are moving higher in early trading, rebounding from yesterday’s declines which saw all three major averages close lower. The modest sell-off was led by oil and energy stocks which dropped 3.5% and 1.4%, respectively, on a higher than expected increase in crude stockpiles; the commodity ended the day at $44.71/barrel, and is continuing lower this morning. Overnight, conflicting manufacturing data out of Japan and China left Asian markets mixed; the Nikkei inched up to a 3-month closing high, while the Shanghai Composite lost 0.7%. European markets are mostly higher, led by Spain’s IBEX (+1.9%), following the release of Purchasing Managers’ Index (PMI) reports from multiple countries; the FTSE 100 is unchanged despite a notable beat from the UK. Finally, COMEX gold and the dollar are both modestly lower, and the yield on the 10-year Treasury is up to 1.60%.

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  • Employment report preview. The U.S. Bureau of Labor Statistics (BLS) will release its August Employment Situation Report tomorrow, Friday, September 2 at 8:30 AM ET. At 8:31 AM ET, all the traders on Wall Street will head for the Hamptons for the Labor Day Weekend. The market is looking for an increase of 180,000 jobs, a 4.8% unemployment rate and a 2.5% year-over-year gain in wages as measured by average hourly earnings. The range of estimates on jobs is +125,000 on the low end and +255,000 on the high end. In our view, unless the August jobs report is unambiguously strong (jobs +250,000 or more, accelerating wages and upward revisions to job counts in prior months), the Fed is likely to pass on raising rates in September. On the other hand, a weak report (+125,000 or so) would still keep the Fed on track to raise rates in December, as Fed officials have been clear that job growth as low as 100,000 per month is sufficient to tighten the labor market, push up wages and ultimately, inflation.
  • Layoff announcements declined in August, another sign that the labor market is on solid footing post-Brexit, but announcements remain elevated in the energy sector. There were 32,188 announced job cuts in August 2016, down from 45,346 in July 2016 and 21% below the 41,186 in August 2015. Energy layoffs in August totaled just 2,400, well below the 14,000 average monthly job cut announcements in the energy sector year to date through July 2016. In the past 12 months, there were 568,000 announced layoffs economy-wide, roughly 100,000 higher than the levels seen in 2012-14, which, taken at face value, suggests some weakening in labor market trends. But 125,000 (or just under 25%) of the 559,000 announced layoffs in the past 12 months came in the energy sector. To put that in context, energy jobs only account for 1-2% of overall employment in the U.S. Although energy prices have stabilized and moved higher in recent months, oil production remains weak, and we continue to expect more layoffs in the energy sector in the coming weeks and months. Outside of energy, the layoff data are consistent with a solid labor market.
  • Initial claims remain low. New claims for unemployment insurance came in at 263,000 for the week ending August 27th, 2016, slightly below consensus expectations. New claims remained near 40-year lows, another signal that the labor market in the U.S. is little changed from pre-Brexit. Claims are up 1,000 from their level 26 weeks ago. In the past, claims need to rise more than 75,000 over a six-month (26-week) period to indicate a recession, so there is no recession signal from claims.
  • U.K. Manufacturing Stronger Than Expected. U.K. PMI manufacturing data jumped to 53.3 in August, a 10-month high. Worries about the Brexit are not bothering U.K. companies, in fact they may be benefiting from the 15% decline in the pound since the vote. The pound is higher today, up about 1% on this news. U.K. stocks initially rallied, but are down slightly as the market nears its close in London.
  • Chinese Manufacturing Surprises to the Upside. Data released overnight suggests that the Chinese heavily manufacturing weighted “old economy” is stabilizing. The August official PMI, consisting largely of State Owned Enterprises (SOE) rose to 50.4 from 49.9 in July, above expectations. The unofficial manufacturing PMI data from Caixin, focusing on smaller companies was 50, slightly below the 50.1 estimate. In aggregate, this data suggests stability, though not reacceleration in Chinese manufacturing. Chinese equities are generally insensitive to this sort of data. Stocks in Shanghai were down 0.7% overnight, though many Chinese stocks trading in Hong Kong gained. The yuan, which may be more economically sensitive than stocks, rose slightly after this announcement.
  • Goodbye August. In the end, the S&P 500 was down 0.1% for the month, ending the five month win streak. Financials were the big winner, as Fed members opened the door to higher rates. As a result, utilities and telecom were the big losers – with higher yielding assets taking a hit. The month will go down in history as one of the least volatile months ever. In fact, the S&P 500 traded in a range of only 1.54% for the entire month using closing prices. This was the smallest monthly range since August 1995 and 7th smallest monthly range since 1928. Lastly, there wasn’t a single 1% move (up or down) for the entire month and for 38 days total as of yesterday. November 2014 is the last time a calendar month did not have a 1% daily move.
  • Hello September. Historically, September is the weakest month for equities. In fact, going back to 1928, the S&P 500 is down 1.06% on average and higher only 44% of the time. May and February are the only other two months to average a negative return at 0.17% and 0.05%, respectively. Since 1950, September is once again the worst month on average and only August has been worse over the past 20 years. It is worth noting that the past 10 years September has been higher six times and actually sports a positive average return of 0.3%, ranking it 7th out of the 12 months. Today on the LPL Research blog we will take a closer look at September and dive into how this month tends to see the largest drops when the year is weak heading into this troublesome month. Fortunately, 2016 looks potentially strong heading into September.

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Thursday

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