Market Update: Friday, September 1, 2017

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Yesterday’s Market Activity

  • U.S. stocks rose. S&P 500 Index +0.6%, Nasdaq +1.0%, Dow +0.3%. Strong economic data drove gains along with a surprise in ADP private payrolls.
  • Healthcare leads again. Biotechnology rally continued; materials, technology also strong. Consumer discretionary, financials lagged.
  • Busy data day. July U.S. personal income beat consensus, but spending growth lowered. Core PCE price index increased, but by lowest level since December 2015 at 1.4% year over year, but was largely in line. Chicago PMI also in line. Pending home sales unexpectedly fell. Overseas, Eurozone August inflation surprised to the upside, China manufacturing PMI unexpectedly improved, though services were softer.
  • Treasuries strengthen, 10-year yield ended at 2.12% on somewhat disappointing economic economic data.
  • U.S. dollar fell (-0.1%) after Treasury Secretary Mnuchin suggested weaker dollar could help U.S. trade.
  • Oil +2.4% to $47.07/bbl. as Hurricane Harvey shut down nearly 25% of U.S. refinery capacity; gas prices surged nearly 8%.

Overnight & This Morning

  • U.S. stocks little changed after jobs data comes in below expectations (details below).
  • Asian markets mixed after positive PMI. KOSPI -0.2%, Nikkei +0.2%, Shanghai Composite flat.
  • European equities solidly higher again following various manufacturing PMIs, weaker euro also helping. STOXX 600 +0.7%.
  • Crude oil -1.3% to $46.75/bbl. after yesterday’s big bounce.
  • Dollar weakening, Treasuries lower following jobs report. 10-year yield +5 basis points (0.05%) to 2.17%.

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Key Insights

  • The month of September tends to get a lot of attention due to it being weak historically. Since 1928[1], it has been the worst month of the year for the S&P 500 Index, down 1.0% on average and higher only 43.8% of the time. Over the past 20 years it has been the second worst month, but over the past decade it is up 0.1% on average. Still, it has been lower each of the past three years. It is important to note that we do pay attention to seasonal trends, but it is also important to look at other factors. Considering the S&P 500 has now been higher 10 consecutive months on a total return basis (the longest streak since 1995) and hasn’t had so much as a 3% correction in almost 10 months, we believe the odds are in favor of some normal fall volatility.
    [1] Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1928 incorporates the performance of predecessor index, the S&P 90.

Macro Notes

  • Job growth disappointed in quirky statistical month, but was still solid. The U.S. economy added 156,000 jobs in August, missing expectations of 180,000 and decelerating from a downwardly revised 189,000 in July. August has historically been a quirky month for jobs growth due to late summer transitions, and has had a tendency to be revised higher. But the impact of Harvey on economic data in the coming months will make the trend hard to track. Wage growth disappointed, rising only 0.1% month over month (2.5% year over year) after more solid growth of 0.3% last month, and the unemployment rate ticked up from 4.3% to 4.4%. While the 2017 average of 186,000 jobs added per month is slower than the 2014-2016 average of 221,000, such slowdowns are normal as we move later into the cycle; even growth of 150,000 jobs per month will be enough to slowly tighten the labor market. The report may lower the likelihood of an additional Federal Reserve (Fed) rate hike in 2017.
  • PMI figures were released for many countries in Asia. After official Chinese PMIs came in better than expected two days ago, last night the Caixin PMI, which focuses on mid-sized and smaller companies that have less state involvement, was released. The data also came in better than expected and better than previously released data. Export orders were the highest in since 2010, suggesting an overall positive tone for the global economy, not just for China. The Chinese economy seems stable and growing, though at a fairly modest pace. Japanese PMI was 52.2, lower than the previous month, but it still suggested continued expansion in the Japanese economy. South Korean PMI was 49.9, just shy of the 50 that separates expansion from contraction. South Korean export growth was 17.4%, better than expectations, and similar to the export data from China, it suggests overall health in the global economy.
  • European manufacturing PMI data came in strong in most countries, providing further indication of the strength of the regional economy. The figures, while strong (57.4 for the region as a whole), were generally in line with expectations. The one exception was the U.K., where the 56.9 reading was well ahead of the 55 forecast. The relatively weak U.K. pound is helping exporters, likely feeding through to the PMI data.
  • August eked out a gain. The S&P 500 closed higher by 0.6% to mark its fifth consecutive monthly gain. The Dow has also gained five months in a row, while the Nasdaq has been higher nine of the past 10 months. On a total return basis (including dividends), the S&P 500 gained for the tenth consecutive month. That is the longest streak since 10 in a row in 1995.
  • Out of Washington Treasury Secretary Mnuchin told CNBC that the White House had a very detailed tax reform plan. He stressed the debt ceiling would be raised and that a weaker dollar was somewhat better for U.S. trade. He also noted that President Trump will decide on the next Fed chair later this year.

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