This commentary was excerpted from the weekly roundup sent to subscribers of Action Alerts PLUS, a charitable trust co-managed by Jim Cramer and Jack Mohr. Click here to learn about this actively traded stock portfolio.
Fear, panic and anxiety were the only three words to describe the bulk of this week's trading. A continued slide in oil coupled with concerns about China's economy, which spilled over into global markets, and a supposed nuclear test in North Korea all slashed U.S. equities to kick off the worst start to a year ever in the markets. A rebound in Chinese equities (however short-lived it may be) and a solid jobs report (that came gift-wrapped with upward revisions in prior months) failed to brighten the outlook on Friday, adding to the gloom and doom that clouded this week's trading.
For the week, Treasury yields were lower and the dollar ended up against the euro following the jobs report, gold was higher as it experienced safe-haven buying and West Texas Intermediate (WTI) and Brent crude both slid lower on poor demand for gasoline and continued worries over the global oversupply.
Third-quarter equivalent earnings have wrapped up and were relatively mixed, with 61.6% of companies surprising to the upside. Walgreens Boots Alliance (WBA) was the first Action Alerts PLUS holding to report fourth-quarter equivalent earnings, although it was the fiscal-first-quarter results for the company. The results came in better than expected, with EPS of $1.03 coming in $0.07 ahead of consensus and revenues of $29 billion roughly in line with consensus. Importantly, the company narrowed its EPS outlook for the entire fiscal year to $4.30-$4.55, raising the bottom end of guidance $0.05 from $4.25.
On the global front, North Korean officials announced they had detonated the country's first hydrogen bomb on Tuesday night in a provocative move that -- although viewed with skepticism -- nevertheless thrusts the enigmatic nation back into the spotlight at a time when global geopolitical tensions are already sky-high (as a reminder, last weekend we learned Saudi Arabia had severed its diplomatic ties with Iran).
On Wednesday evening into Thursday morning, shockwaves were sent across global markets following a disastrous, shortened trading day in Chinese markets. The selloff in the world's second-largest economy was driven by the Chinese government's surprisingly weak valuation of the yuan, which fell 0.5% below Wednesday's levels (among the biggest day-to-day variation in the country's history).
Making matters worse, there is a strong sense across the globe that Chinese regulators don't know how to properly manage their markets. While the installation of circuit breakers was done with the right intentions, the rules behind them do not truly allow the market to trade in a free fashion -- while stopping a selloff is all well and good, quickly closing the markets only creates a vicious, escalating cycle of panic. In fact -- and likely in light of these reasons -- the Chinese government announced on Thursday morning its decision to suspend circuit breakers for the foreseeable future.
On the economic front, ADP's monthly employment report indicated that roughly 260,000 new private-sector jobs were added in December, up from a downwardly revised 211,000 increase (from 217,000) in November. This marks the largest increase in private payrolls for 2015. Reflecting a recurring theme, services accounted for the vast majority of job gains (234,000), while goods-producing jobs showed a more modest increase (23,000).
On Thursday, the Department of Labor reported that initial jobless claims for the week ending Jan. 1 were 277,000, which was 10,000 claims lower than the prior week's figure and 2,000 above expectations. The four-week moving average for claims (which is used as a gauge to offset volatility in the weekly numbers) dropped by 1,250 claims to 275,750. Claims have remained below 300,000 -- the threshold typically used to categorize a healthy jobs market -- for 44 straight weeks, which is the longest streak since the early 1970s. The low number of claims again reinforces the health of the U.S. jobs market, which has been one of the only sustained forces helping to move the economy forward.
This was reiterated on Friday, when the Labor Department reported that the U.S. economy added 292,000 jobs in December, absolutely shattering estimates for a gain of around 210,000 and beating November's very solid 252,000 payroll increase (numbers for October and November were upwardly revised to 307,000 and 252,000, respectively). With the upward revisions and the solid report this month, the U.S. economy averaged a very strong 284,000 payroll gains in the last three months of 2015. For the full year in 2015, the U.S. economy averaged 221,000 job gains per month, which, while still below 2014's 260,000 average, is above the psychologically important 200,000 threshold and also marks the second-best year for job growth since 1999. In all, 2.7 million jobs were added in 2015 compared with 3.1 million in 2014.
Digging deeper into the release, the unemployment rate was reported to have remained stable at 5%. The unemployment rate hasn't fallen below this level since 2007. The labor force participation rate, the measure of how many people in the labor force who can actually be working are doing so or at least looking for work, was at 62.6% in December, a tick up from 62.5% in November, but down a bit from 62.7% in December 2014.
On the downside, average hourly earnings fell by one cent in December to $25.24 (although this is partly due to the hiring of part-time workers during the holiday season), translating to an annualized gain of 2.5%, whereas expectations were for a gain of 2.8% annualized. Healthy growth is typically viewed as being in between the 3%-4% range. While the majority of the report was undoubtedly positive, the still-modest wage growth for the year could slightly dampen the outlook from the Fed's perspective. In theory, a strengthening labor market should yield better paychecks and help fuel inflation. However, inflation has remained significantly lower than the Fed's 2% long-term target. That being said, a tightening labor market overall remains a huge bright spot for the economy.
On the commodity front, the Energy Information Administration reported on Wednesday that U.S. crude inventories drew 5.09 million barrels, which was an upside surprise as expectations called for a 920,000-barrel build. The American Petroleum Institute's report on Tuesday echoed the same trend, as crude drew 5.6 million barrels vs. consensus for a 700,000-barrel build. Gasoline was shown to have built inventories higher than expected in both reports as well.
Despite the drawdown in crude stockpiles in both reports, the larger-than-expected builds in gasoline and product inventories were the bigger story, indicating there was no demand for crude that was turned into consumable products. That being said, these reports were surely overshadowed by continued tensions in the Middle East, where major producing nations are rushing to gain market share by ramping production despite the global oversupply.
Unfortunately, the fears about the strength of the Chinese economy and expectations for continued currency devaluations (and possible cross-border currency wars) also spread to the oil trade. Concerns are mounting that future demand for crude in China, the world's second-largest consumer of crude, may not be able to relieve the oversupply of the commodity across the globe. This has only clouded the outlook for oil even further, as the trade is also pressured, in addition to what we've mentioned above, by expectations for Iran's oil to enter the market and by U.S. production levels, which have fallen much slower than expected.
Third-quarter earnings have concluded and were relatively mixed. Total third-quarter earnings growth is down 3.1%; of the 413 non-financials that have reported, earnings growth is down 2.4% vs. expectations thus far for a 3.3% decrease. Revenues are decreasing 4.1% vs. expectations throughout the season for a 4.07% decline; 61.6% have beaten expectations, 35.4% have missed the mark and 3.0% were in line with consensus. Telecom services, health care energy and info tech have led the strong performance. Financials and utilities have posted the worst results so far in the S&P 500.
Next week, 11 companies in the S&P 500 report earnings. Wells Fargo (WFC) is the only Action Alerts PLUS holding set to report. Other key reports include: Alcoa (AA), HIS (HIS), CSX (CSX), Supervalu (SVU), Infosys (INFY), JPMorgan Chase (JPM), Taiwan Semi (TSM), Intel (INTC), BlackRock (BLK), Citigroup (C), Fastenal (FAST), PNC (PNC) and U.S. Bancorp (USB).