Robust Jobs Report Another Step Toward Reopened Economy

Holiday fireworks began early this weekend as the government delivered a blowout employment report Friday. With 850,000 jobs created in June, it’s a solid sign of economic growth continuing as the U.S. reopens.

That was up from a revised 583,000 jobs created in May, so the two-month tally of more than 1.4 million really seems to put the employment picture back on track following a disappointing stumble back in April. The June number also came in well above Wall Street’s expectations for around 680,000.

A Look Below Payroll Headlines

Some of the best nuggets came below the headline figure. For instance, the number of people employed part time for economic reasons fell by 644,000 in June. It’s just one month, but it’s still a solid indication that people are getting back to full-time work as reopening continues.

Also, the number of people who said they were prevented by the pandemic from looking for work fell dramatically to 1.6 million in June from 2.5 million in May. It feels like COVID is less of a threat to the job market now than it had been for so many months.

This doesn’t mean everything is perfect. Construction jobs, a key indicator in the report, had another soft month with a slight drop. Mining, warehousing and manufacturing jobs also barely moved, and average weekly hours worked in manufacturing fell. However, if Washington’s infrastructure plan continues to get traction, maybe we’ll see the construction number rise in the future.

Also, average hourly wages didn’t rise as much as expected. The 0.3% climb in June was short of the 0.4% Wall Street consensus. This probably reflects that around 40% of the jobs added in June were in the leisure and hospitality sector. Nothing wrong with those hotel and restaurant positions, but they do tend to pay a bit less than construction jobs, for example, and could be dragging the wages figure a bit.

Another big jump came in the local government education area, which added 155,000 jobs. This probably isn’t going to be a big shock because schools are under pressure to get things into place for full reopening in the fall. However, it’s possible this is a one-time bump that won’t roll into the July report, and it basically accounts for a lot of the beat in the headline report number.

Overall unemployment remained at 5.9%, which might not be very rewarding for the Fed. One element of the central bank’s dual mandate is maximum sustainable employment, but the economy appears to be a long way from getting back to the under 4% unemployment that existed before COVID. The stubborn overall unemployment rate might be one factor that keeps the market from getting too worried now about the Fed getting more hawkish. So could the temporary bump in the headline jobs figure created by those government education jobs. Neither of those arguably indicates an overheating economy.

The stock market made slight gains in pre-opening bell trading after the jobs report, but nothing too immense. The bond market, which had been scampering higher overnight, didn’t appear to move initially on the jobs news. This could reflect investor ideas that the report isn’t likely to cause any real indigestion for the Fed, but we’ll have to watch. It’s still early.

Besides Jobs...

In other news, crude could be a focus today as OPEC+ put off its output decision that had been due Thursday and continued to talk. A deal to raise output apparently got held up at the last minute when one member blocked it, and then the meeting descended into “bitter infighting,” Bloomberg reported. Crude prices reached nearly three-year highs yesterday, giving energy stocks a boost, but then fell early Friday.

If you say you drive an electric car and don’t worry about oil prices, then keep an eye out for Tesla (NASDAQ:TSLA) shares. The company announced it delivered 201,000 vehicles in Q2, up from 184,000 in Q1. That was on the low end of expectations, financial media reports said. Shares were down just a tad in pre-market trading.

Asian stocks came under pressure overnight, perhaps due to some tough talk out of China. And there was a big rally in U.S. fixed income overnight, which could be flashing some sort of a warning signal. The 10-year yield has been sinking to well under 1.5% lately, which some market watchers worry could reflect a slowing economic picture.

The Rich Get Richer?

The market’s slow grind higher to new records continued Thursday, led by the trillion-dollar “mega-caps.” Shares of four of the five “FAANG” stocks plus their cousin Microsoft (NASDAQ:MSFT) made decent gains. So did Nvidia (NASDAQ:NVDA), the chip company that enjoyed the best Q2 performance of any S&P 500 stock and recently reached $500 billion in market capitalization.

Of the top-10 stocks in terms of market cap, eight rose Thursday. Only TSLA and Amazon (NASDAQ:AMZN) didn’t show up at the summer picnic. Those two have had nice runs over the last month, though, as the market seems to be shifting back more into the mode it was in before and during COVID when investors crowded into the biggest stocks they could find.

The big keep getting bigger, too. Apple (NASDAQ:AAPL) and MSFT are at or nearing all-time highs and an analyst put a $1,000 price target on NVDA, which closed above $800 a share on Thursday but began the year around $500.

Having said that, the small-cap Russell 2000 index still has the best gains of any major index this year at 18%, followed by the S&P 500 Index at 15%. It might be interesting to see where that relationship heads in the coming months, especially with earnings for many of the largest banks and Tech companies straight ahead.

Remember that the SPX is market-cap weighted, so it could outperform if those huge companies continue to propel it forward. The problem with that is it can become a situation like we had in mid-2018, when just a few behemoths were rising while the rest of the market treaded water. When investors began to take profit on their positions in the biggest names, the whole market crumbled.

Not that past is prologue, naturally, and it was only a few weeks ago that a lot of people were looking around at a market that seemed pretty nicely balanced between “value” and “growth.” The “defensive” sectors like Staples and Utilities have been getting left out, but Utilities had a nice day Thursday as Treasury yields continued to stumble around below 1.5% (for more on the defensive sectors, see below).

Cyclical sectors like Energy, Industrials, and Materials also got a boost Thursday thanks in part to decent economic data on manufacturing and construction (more below). A strong earnings report from Walgreens Boots Alliance (NASDAQ:WBA) didn’t show much sign of helping the Consumer Staples sector, and semiconductor shares other than NVDA took a beating, hurt by a weak performance by Micron (NASDAQ:MU) after its earnings.

Pay More? Get Punished

There could be an earnings trend shaping up here that’s worth keeping in mind beginning the week of July 13 when earnings season gets into full gear. Over the last week, both FedEx (NYSE:FDX) and MU reported strong quarters and said business remains good, but saw their stocks dinged by rising costs. MU, for instance, forecast more capital spending than analysts had expected.

This seems to be something investors don’t want to hear, but keep in mind that even if costs rise, the continued growth in revenue could outweigh it and keep margins clean. Sometimes it takes more than a day for all the information shared in an earnings report and call to really filter through.

It’s also arguably good for the economy to see companies spending more, as long as it’s not due to inflation. For instance, MU said it’s going to raise its investment in a chip production technology known as eUV, or extreme ultraviolet lithography. It’s not necessarily a bad thing when a company tries to stay on the cutting edge, even if that means higher costs in the near term. We’ll see how it all shakes out over time.

Holiday Ahead Followed By Fed Minutes Next Week

In the shorter-term, next week is kind of sparse from a data standpoint, and the market is closed Monday for the July 4 Independence Day holiday. Trading might be a bit thin today after the jobs report gets digested and people start to leave early for the long weekend. If you do plan to trade, consider your position sizes, because market moves might be faster and more dramatic than on a regular day.

Also, keep an eye on the futures market Monday night to see how things react after being closed for a few days. Sometimes that can be helpful in getting a sense of direction for the following day, especially when there’s been a longer than normal weekend.

Once we get back, the big event next week could be Fed minutes from its last meeting, due Wednesday afternoon. Obviously the Fed didn’t have today’s jobs data when it met, but it did throw a bit of a curveball when it talked about possibly getting more hawkish. The minutes could give us more of a behind the scenes look at what Fed officials discussed.

Data Dive: A couple of key data points came up just short of expectations yesterday, though not enough to really raise any major red flags. Even though both May construction spending and the June ISM manufacturing index didn’t exactly light up the world, they were both pretty decent if you look past the headlines. First of all, anything above 60% for the ISM is considered both rare and healthy. That’s why it’s probably no big deal that June’s 60.6% was down just a tad from 61.2% the month before. From this perspective, it looks like the U.S. manufacturing economy is rolling right along and it’s no surprise both the Materials and Industrials sectors put on a little rally after the data.

Construction spending fell 0.3% in May when analysts had expected a 0.3% rise. That’s not necessarily good. However, the critical component of construction spending—residential spending—actually rose 0.2% and is up more than 28% year-over-year. New single family home construction spending rose a strong 0.8%. So where did the losses show up? In both public construction and manufacturing construction. While you don’t want to see drops, things have come a long way from the depths of last year’s downturn. Data next week is pretty sparse, so investors will have these numbers and the payrolls report to chew on for a while.

Yield Search: Two of the worst-performing sectors in Q2 were staples and utilities, ones sometimes thought of as “defensive” because they often attract investor money when the economy is weak. It is a bit of a head scratcher that these sectors—which some associate with big dividends—both performed so poorly in Q2 when Treasury yields were so weak. The Utilities sector sometimes is thought of as a “bond proxy” because it tends to move more slowly than most other sectors and also often sports higher dividends than many, though dividends can go down and are never guaranteed. When government bond yields are 1.5% or less, as they are now, and the overall S&P 500 yield is under 1.4%, stocks with yields of 1.5% or higher can begin to look attractive to investors who want income.

One idea behind the utilities and staples recent struggles after a strong start to the year is that maybe people moved into the energy sector for yield, as that sector racked up nearly 7% quarterly gains and companies there focused on paying back investors after some rough years. Energy is up 40% year-to-date after being the weakest sector three years in a row, though as a reminder, a lot of companies normally thought of as being energy-oriented also find a home in the utilities group. Financials, another sector that had some challenges in the 2018–2020 period, are a surprising second in the standings for 2021.

Keep This Idea In Reserve: With China’s yuan recently touching three-year highs, along with its central bank announcement that it’s working on a so-called “digital yuan,” there’s been new speculation that China may at some point challenge the United States’ dominance as the global reserve currency, or in other words., the currency in which global commodities and financial contracts are denominated. According to data from the International Monetary Fund (IMF), some 60% of cross-border transactions are dollar-denominated, with the euro, yen, and pound rounding out the top four. The yuan’s share is about 2% according to the IMF. But despite its current footprint, several prominent financial minds—including hedge fund titan Ray Dalio—say the yuan’s star is about to shine on the international stage.

You might not want to hold your breath. Policy wonks are quick to point out that being a reserve currency is a double-edged sword. Sure, the dollar’s reserve status has helped give the U.S. the flexibility to maintain stability while running fiscal and trade deficits. It’s also helped lend an extra layer of power to the banking system. But having a currency that’s in high global demand can be a drag on a country’s export sector. Considering China’s export-heavy manufacturing sector—its trade surplus with the world increased 27% last year to a record $535 billion—it’s not something that’s likely to happen at the flick of a switch, digital or otherwise.

Disclaimer: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.