On Friday, the BLS released the results of the agency's two employment surveys. Non-Farm Payrolls, which are usually taken by the financial media at face value, and are considered for that reason to be the headline print of the monthly event, surprised to the upside at 263K as wage growth also surprised to the upside.
Markets sold off early on Friday (good news is bad) in response to these headlines only to rally into day's end (closing very close to unchanged) as investors came to realize that there were more holes in the November employment report than one might find in Swiss cheese.
The Non-Farm Payrolls number comes from the Establishment Survey. The Household Survey showed job losses of 138K for November, which made some sense given that the ADP Employment Report had printed well below consensus earlier in the week. Since this past March, the Establishment Survey shows a divergence of 2.68M jobs from the Household Survey. Probably nothing here worth digging into.
In addition, the participation rate dropped to 62.1%, as the unemployment rate... when dissected by level of education actually increased for college graduates and for workers with some college. The marketplace gains that kept the overall unemployment rate level at 3.7% were made largely by the least educated workers in November. Oh, and this... that wage increase came hand in hand with a decrease in hours worked, debunking the idea that the increased wages had been a sign of increased demand for labor.
The facts go on and on, if one cares to look. November was not "another month of strong" labor market demand. In fact, over all, this report is mixed, and leaves one asking questions. If demand for labor is so strong, why did 186K individuals drop out of the labor force in November? The number of working age individuals not in the labor force is now over 100M. 100M! If that doesn't alarm, then nothing does. One sees growth in manufacturing jobs in this BLS report. That certainly does not line up well with what the ISM told us last week.
Oh, before I move on, here's another real cutie that the financial media either misses or chooses to miss in aggregate because it's negative. Full-time workers as of November according to the BLS, totaled 132.32M, down 257K from this past July. Yes, there were less full time jobs today in the US in November than there were four months earlier. Meanwhile, part-time workers over that time have grown from 25.824M to 26.092M (+268K). That sounds like a less than room temperature labor market to me.
Intense Week
How do we even begin to look at the past week? Of course, Friday's labor market survey data took the attention by week's end, but last week was a five day period chock full of high profile events that impacted markets and economies not just across this nation, but globally. All in all, US markets piled a positive November on top of a positive October.
For the week, the S&P 500 would post four "down" days and and just one "up" day, but that one was a real doozy. The down days save for one, were rather mild and did not bleed a very deep shade of red. US markets started out the past week with their worst single day performance of the five days comprising the set.
This came largely due to rising new Covid infections in China that had led to protests across that nation and a fear that Beijing would both crack down on the protesters and ramp up the zero-Covid policies that have crippled the Chinese economy. Not to mention its impact upon global commerce. Markets eased with a loose statement that Chinese authorities would boost vaccination rates for the elderly. The situation remains fluid.
From there, the world watched as the NATO alliance held a two day summit in Bucharest, Romania where a collective vow was made to eventually allow Ukraine into the pact. Of course standing by Ukraine demands increased defense spending across Europe despite a difficult fiscal situation. The Majority of NATO nations, though the number has improved, still need to get their spending of defense up to mandated levels.
Defense stocks have prospered this year and this has the potential to extend that industry-specific party deep into 2023 and potentially beyond.
Finally, it was Wednesday and Fed Chair Jerome Powell spoke to an investing public that was all ears. The trajectory of monetary policy is what really matters to investors in late 2022. The Chair warned that the central bank may very well have to maintain a restrictive policy stance for a lengthy period of time. No surprise there.
However, Powell did offer that public a glimmer of hope, as he indicated that the pace of aggression on the front end of the yield curve would likely ebb and that for the US economy a soft-ish landing was "very plausible." The pace of rate hikes, possibly slowing, was expected. The voluntary and optimistic take on the economy? That was both pleasant and not priced in at the time.
Not even close to done. In addition to Powell's speech on Wednesday, the US House of Representatives passed legislation that day that would result in averting a nation-wide rail strike. On Thursday, the Senate passed this bill by an 80 - 15 tally and sent the bill to President Biden for a signature. It is estimated that a rough 45% of all US freight is in some way reliant at some point on rail travel. This was a bigger deal than most think. Kept the economy from artificially slowing more quickly than it has to.
By Friday, The G-7, European Union and Australia agreed to set a $60 a barrel price cap on Russian crude in order to punish Moscow for the war in Ukraine, but without starving the rest of the world from Russian oil. That led to the weekend, and with it... an OPEC+ virtual meeting that left oil production targets exactly where they have been since being cut in October.
Marketplace
It certainly was not all fun and games last week, but the week was green overall, and the heaviest trading volume of the week was certainly evident when markets advanced then when they contracted. The S&P 500 rallied 5.38% for November, and 1.13% for last week. The Nasdaq Composite, which is heavily exposed to tech, gained 4,37% in November and 2.09% for the past five days. The Russell 2000 gained 2.15% for the month of November and 1.27% for last week.
Now, for the Sarge fave, the Philadelphia Semiconductor Index, which we always keep an eye on as this group has been the engine of both the economy and at times, the markets. This index gained an incredible 18.55 for November and a modest 0.73% last week.
Nine of the 11 S&P sector-select SPDR ETFs shaded green for the week. There was no pattern evident in terms of types of sectors that led as growths, cyclicals and defensives were scattered throughout the performance tables. Communications Services (XLC) led to the upside last week, gaining 3.47%, followed by Consumer Discretionaries (XLY) at +2.33%. Both Financials (XLF) and Energy (XLE) closed down for the week.
According to FactSet, the S&P 500 now trades at 17.6 times forward looking earnings, up from 17.1 times two weeks ago. This ratio remains significantly below the S&P 500's five year average of 18.5 times, but has surpassed and now stands well above its 10 year average of 17.1 times.
Earnings
Third quarter earnings season is essentially over. According to FactSet, S&P 500 earnings grew 2.5% year over year for the quarter on revenue growth of 10.9%. For the quarter, 70% of the S&P 500 beat earnings expectations, while 71% of the S&P 500 reported an upside revenue surprise. For the quarter, the S&P 500 in aggregate, reported a net profit margin of 11.9%, down from a year ago comp of 12.9%.
Looking at the fourth quarter of 2022, with the large banks still six weeks away from releasing their numbers, and still sticking with data provided by FactSet, S&P 500 earnings are seen contracting 2.4% on revenue growth of 4.4%. Both of those projections have moved lower over the past two weeks.
This leaves full year projections at earnings growth of 5.2% on revenue growth of 10.5%. At this time for calendar year 2023, consensus is for earnings growth of 5.6% on revenue growth of 3.3%. with extremely low levels of growth expected for Q1 and Q2, especially Q2. Hmm, where have we heard that before?
Walking Point
This week will be far less active from a macroeconomic perspective than what we have recently become used to. This (Monday) morning, we'll get a couple of reads on the health of the service economy from S&P Global and the Institute for Supply Management. This is key as services comprise the majority of US economic activity and of late, these two surveys have diverged from one another significantly. (Kind of like the US employment data, but at least these surveys are not conducted by the same government agency.)
After that, it gets quiet. Really quiet. Not only has the Fed gone into their media blackout period ahead of their December 14th policy meeting, but the next piece of "major" market impacting macro we'll see after Monday will be the November PPI this Friday. Consensus view is for a notable slowing in the pace of producer/wholesale year over year inflation. November CPI will not hit the tape until next Tuesday (a week from tomorrow).
Even out of season, these days, there always seems to be at least a few notable individual companies reporting earnings. This week, we'll hear from AutoZone (AZO) , MongoDB (MDB) , Campbell's Soup (CPB) , Thor Industries (THO) , GameStop (GME) , Broadcom (AVGO) , Chewy (CHWY) , Costco (COST) , DocuSign (DOCU) , Lululemon (LULU) , RH (RH) , and Oracle (ORCL) .
At last glance, futures markets trading in Chicago are pricing in a 79% probability for a 50 basis point increase to be made to the target range for the Fed Funds Rate on December 14th, with a 56% probability for at least another 50 bps rate hike on February 1st, 2023. Those same futures markets are currently pricing in a terminal rate of 5% to 5.25% that will not be reached until May and will only hold into June before a rate cut next July. Of course, the projected course of events is in a constant state of change.
Economics (All Times Eastern)
09:45 - S&P Global Services PMI (Nov-rev): Flashed 46.1.
10:00 - ISM Non-Manufacturing Index (Nov): Expecting 53.3, Last 54.4.
10:00 - Factory Orders (Oct): Expecting 0.7% m/m, Last 0.3% m/m.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (SAIC) (1.73)
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