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Markets Jump on Upbeat Employment Report

U.S. equities finished higher, with the S&P 500 Index notching another record, as stronger-than-expected October job growth, as well as a solid upward revision to September's figures, more than offset continued contraction for the manufacturing sector as reported by ISM. Some favorable manufacturing data out of China also helped to bolster global sentiment. Treasury yields were higher, but the U.S. dollar nudged lower, while crude oil prices gained solid ground and gold posted a modest gain. In earnings news, Dow member Exxon Mobil announced a relatively better-than-expected quarterly performance, but fellow Dow component Chevron reported mixed results. Elsewhere, BeiGene rallied after announcing a global strategic oncology collaboration with Amgen and Fitbit jumped after agreeing to be acquired by Google.

The Dow Jones Industrial Average (DJIA) rose 301 points (1.1%) to 27,347, the S&P 500 Index increased 29 points (1.0%) to 3,067 and the Nasdaq Composite advanced 94 points (1.1%) to 8,386. In moderate volume, 847 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil jumped $2.02 to $56.20 per barrel and wholesale gasoline was up $0.07 at $1.66 per gallon. Elsewhere, the Bloomberg gold spot price was $0.40 higher at $1,513.39 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies— fell 0.2% to 97.20. Markets were higher for the week, as the DJIA gained 1.4%, the S&P 500 Index advanced 1.5% and the Nasdaq Composite increased 1.7%.

Dow member Exxon Mobil Corporation (XOM $70) reported Q3 earnings-per-share (EPS) of $0.75, including a $0.07 tax-related benefit, versus the $0.67 FactSet estimate, as revenues declined 15.1% year-over-year (y/y) to $65.1 billion, above the projected $60.9 billion. Shares were higher.

Dow component Chevron Corporation (CVX $116) reported Q3 EPS of $1.36, including a tax charge of $430 million, which may be making comparisons to the expected $1.49 unclear, with revenues falling 17.9% y/y to $36.1 billion, versus the expected $38.0 billion. Shares finished slightly higher.

Shares of BeiGene Ltd. (BGNE 190) jumped after announcing a global strategic oncology collaboration with Amgen Inc. (AMGN $218) for the commercialization and development in China. In connection with the collaboration, AMGN will purchase a 20.5% stake in BGNE for about $2.7 billion in cash. AMGN also gained ground.

Fitbit Inc. (FIT $7) rallied after announcing an agreement to be acquired by Google, which is owned by parent company, Alphabet Inc. (GOOGL $1,272), for $7.35 per share in cash, a total equity value of about $2.1 billion. GOOGL traded higher after the announcement.

October job growth exceeds estimates, manufacturing remains hampered

Nonfarm payrolls (chart) grew by 128,000 jobs month-over-month (m/m) in October, compared to the Bloomberg forecast of an 85,000 increase. The rise of 136,000 seen in September was revised to a gain of 180,000 jobs. Excluding government hiring and firing, private sector payrolls increased by 131,000, versus the forecasted gain of 80,000, after rising by 167,000 in September, revised from the 114,000 increase that was initially reported.

The unemployment rate ticked higher to 3.6% from September's 3.5% rate, in line with forecasts, while average hourly earnings were up 0.2% m/m, below projections of a 0.3% increase, and versus September's unrevised flat reading. Y/Y, wage gains were 3.0% higher, matching estimates and September's upwardly-adjusted gain. Finally, average weekly hours remained at 34.4, matching estimates.

The strength in the labor market continues to counter growing recession concerns, and Schwab’s Chief Investment Strategist Liz Ann Sonders offers a look at leading indicators as the markets try to assess the length of the runway between now and the next recession in her latest article, It's Late: So Says the Profits Spread and Leading Indicators. Liz Ann notes that decelerating leading indicators imply the late-cycle view for the economy should remain the consensus, while adding that when it comes to economic data and tying it to stock market behavior; or using it to make a judgement about where we are in the cycle; better or worse tends to matter more than good or bad. She adds that she not only notes the level of each leading indicator component; but importantly their trends and right now it's a bit of a sea of red in the trend column; which bears watching for further deterioration (and a more elevated risk of recession).

The October Institute for Supply Management(ISM) Manufacturing Index (chart) improved to 48.3 from September's 47.8 level, but below forecasts of an increase to 48.9. This was the third month in a row the index remained in contraction territory (a reading below 50), as the contraction in production accelerated, along with backlog of orders and prices, while new orders and employment both improved but remained south of the key 50 mark. New export orders was a standout, jumping 9.4 points back into expansion territory. The ISM said comments from the survey reflected an improvement from the prior month, but sentiment remains more cautious than optimistic.

The final Markit U.S. Manufacturing PMI Index was revised lower to 51.3 for October, versus expectations to be unchanged at 51.5, but was slightly above September's 51.1 level. A reading above 50 denotes expansion. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently, while its survey of companies may be more domestically-focused.

Construction spending (chart) grew 0.5% month-over-month (m/m) in September, versus projections of a 0.2% increase, and following August's downwardly-revised 0.3% decrease. Residential spending gained 0.6% m/m and non-residential spending increased 0.5%.

Treasuries were lower, as the yield on the 2-year note rose 4 basis points (bps) to 1.56%, while the yields and 10-year note and the 30-year bond gained 2 bps to 1.71% and 2.20%, respectively. For a look at fixed income investing, check out Schwab's Chief Fixed Income Strategist Kathy Jones' commentary, The Bond Investors' Dilemma.

Bond yields trimmed some of this week's declines that followed a third rate cut from the Fed this year and the suggestion that it may pause its rate cut campaign as its assesses data. For a look at the Fed's action check out Schwab’s Liz Ann Sonders' latest article, Fed Cuts Rates as Expected … Three and Done or More to Come?

Europe higher following global data, Asia mixed

European equities finished higher, as the global markets appeared to get some support from today's stronger-than-expected U.S. October job growth and favorable revisions of the prior month's figures, which followed a relatively upbeat read on Chinese manufacturing activity. In economic news in the region, U.K. and Swiss manufacturing output both improved in October, but remained in contraction territory. The euro and British pound nudged higher versus the U.S. dollar, while bond yields in the region gained ground. In the wake of the merger announcement this week by PSA Peugeot SA(PUGOY $26) and Fiat Chrysler Automobiles NV(FCAU $16), Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, delivers his latest article, Will The Crash in Autos Drive The End Of This Cycle?, discussing the question of how the last global economic cycle ended with a housing bust; will the bust in auto sales end this cycle? Jeff notes that this auto-led downturn may be less damaging to the global economy than the housing bust was 10 years ago, but automobile manufacturing still accounts for a sizable amount of production, debt, and jobs.

Stocks in Asia finished mixed, with recently resurfaced U.S.-China trade uncertainty continuing to garner attention after reports suggested China was doubting a long-term comprehensive agreement, while some caution likely set in ahead of today's key October employment data out of the U.S. Also, the markets digested a host of economic data in the region, with Hong Kong's Q3 GDP growth falling more than expected and South Korea's exports dropping more than anticipated for last month, but a private survey from Caixin showing Chinese manufacturing output unexpectedly accelerated for October. Stocks in Japan declined, with the yen holding onto yesterday's rally. However, in the wake of the manufacturing data, mainland Chinese equities and those traded in Hong Kong advanced, and Australian securities ticked higher. Markets in both South Korea and India also gained ground. For a look at the global markets, Schwab's Jeffrey Kleintop, discusses in his commentary, Are Stocks Priced for Perfection or Recession?, how fortunately, stocks are nowhere near that overvalued, based on the price-to-earnings ratio. But, he adds that if we take a more refined look at historical stock market valuations at peaks and lows, we find some cause for concern.

Stocks rally for fourth-straight week, S&P 500 back to record high territory

U.S. stocks posted a fourth-straight week of gains, sending the S&P 500 Index back to all-time highs, with optimism of a "phase-one" U.S.-China trade deal lending support, Q3 earnings season continuing to come in better than feared and the Fed delivering a third rate cut of the year. Meanwhile, the economic calendar was mixed but appeared to continue to stave off recession concerns. An unexpected decline in Consumer Confidence, a sharp drop in the Chicago PMI and Friday's softer-than-expected ISM Manufacturing Index, was countered by a stronger-than-expected read on Q3 GDP and Friday's October employment report that showed job growth remained solid. Earnings remained center stage, with results from Dow member Apple Inc. (AAPL $253), General Electric Company (GE $10) and General Motors Company (GM $38) bolstering the stock market rally, while earnings misses weighed heavily on shares of Google parent, Alphabet Inc and Yum Brands Inc. (YUM $101). With the reporting season more than half way done, about 61% of the S&P 500 companies have topped revenue forecasts and nearly 81% have bested profit projections, per data compiled by Bloomberg. The healthcare sector led the market's gains for the week and is leading the way in earnings season, with double-digit revenue growth and over 8.0% earnings growth thus far. Read our rationale for our lone outperform rating on healthcare stocks in our latest Schwab Sector Views: When Yields Talk, Sectors Listen. Treasury yields, the U.S. dollar and crude oil prices all fell on the week, while gold retreated modestly.

Next week, with earnings season continuing to roll on, the economic calendar will bring another dose of key data, headlined by factory orders, the trade balance, Q3 nonfarm productivity and unit labor costs, JOLTS Job Openings, jobless claims, the ISM non-Manufacturing Index and the preliminary November University of Michigan Consumer Sentiment Index.

As noted in our latest Schwab Market Perspective: Don't Place Your Bets, although U.S. stocks are trading near their all-time highs, investor hesitation has persisted due to mixed economic data, the questionable effects of monetary policy and trade uncertainty. We continue to recommend that investors use volatility to rebalance and stay near their strategic asset allocations; maintaining our neutral stance on U.S. equities (with a bias toward large caps at the expense of small caps), and our neutral stance on both developed international and emerging market equities.

International economic reports due out next week that could move the markets include: Australia—Reserve Bank of Australia monetary policy decision. China—Caixin Services PMI and trade statistics. Japan—household spending and labor earnings figures. Eurozone—Markit's Manufacturing and Services PMIs, investor confidence and retail sales, along with German factory orders, industrial production and trade balance. U.K.—Markit's Services PMI and Bank of England monetary policy decision.

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Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

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