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Wall Street Gives Back Good Chunk of Yearly Advance
02-Feb-18 16:30 ET
Dow -665.75 at 25520.96, Nasdaq -144.92 at 7240.94, S&P -59.85 at 2762.13

https://www.briefing.com/investor/markets/stock-market-update/2018/2/2/wall-street-gives-back-good-chunk-of-yearly-advance.htm

[BRIEFING.COM] The sky fell on Friday. Just kidding. The stock market just had a bad day--which has kind of felt as impossible as the prospect of a falling sky since the start of the year.

The Dow Jones Industrial Average tumbled 2.5%, and the S&P 500 and the Nasdaq Composite lost 2.1% and 2.0%, respectively, but the three major indices still hold year-to-date gains between 3.2% and 4.9%. Equities opened Friday with sizable losses and extended those losses throughout the session, finishing at session lows.

Declining issues outnumbered advancing issues 9 to 1 at the New York Stock Exchange. In terms of S&P 500 sectors, 11 of 11 finished in negative territory, with the energy space (-4.1%) pacing the retreat following fourth quarter earnings from Chevron (CVX 118.58, -6.99) and Exxon Mobil (XOM 84.53, -4.54). Both companies missed revenues estimates; Exxon missed profit estimates as well. In addition, a decline in the price of crude oil also weighed on the sector; West Texas Intermediate crude futures slid 0.8% to $65.30 per barrel.

The top-weighted technology sector (-3.0%) also had a rough outing, with Apple (AAPL 160.37, -7.41), Alphabet (GOOGL 1119.20, -62.39), and Visa (V 120.91, -4.81) losing between 3.8% and 5.3% after releasing their Q4 results. Apple and Visa beat earnings estimates, but Alphabet came up short despite reporting better-than-expected revenues. Apple's iPhone sales were disappointing, and the company lowered its sales forecast for the first quarter.

Dow component Merck (MRK 58.56, -1.30) also reported Q4 results, beating bottom-line estimates, but slid 2.2% nonetheless.

On a positive note, Amazon (AMZN 1429.95, +39.95) jumped 2.9%, touching a new intraday record, after soundly beating earnings estimates for the fourth quarter, thanks in large part to changes in the U.S. tax code. The consumer discretionary sector (-0.9%), which houses Amazon, was among the top-performing groups.

Investors received the Employment Situation report for January on Friday morning. Job growth was solid again with the addition of 220,000 nonfarm payrolls (Briefing.com consensus +180,000), but the focal point was the 0.3% jump in average hourly earnings. That was in-line with the Briefing.com consensus estimate, but after taking revisions into account, it left average hourly earnings up 2.9% year over year--the highest growth rate since May 2009.

There has been a burgeoning assumption that the strengthening economy and the tight labor market are going to invite higher wages and wage-based inflation pressures that have been dormant for years. The key takeaway, then, is that the January report has given some data-based life to that assumption and has offered a reasonable basis for the Federal Reserve to move ahead with a rate hike at its March meeting.

U.S. Treasuries were weak ahead of the jobs report release, but selling accelerated in the aftermath, pushing yields to multi-year highs; the benchmark 10-yr yield climbed another eight basis points--extending its weekly gain to 19 basis points--to finish at 2.85%, which is its highest level since January 2014. Shorter-dated issues showed relative strength, however, with the 2-yr yield slipping two basis points to 2.14%. Yields move inversely to prices.

In Washington, President Trump authorized the release of a House Intelligence Committee memo that alleges there was an anti-Trump bias at both the FBI and the Justice Department in investigative matters pertaining to Russia's meddling in the 2016 presidential election. The release received some credit for accelerating Friday's sell off given that it creates some political uncertainty in front of next week's spending deadline; Congress will have to pass a new spending resolution by February 8 to avoid another government shutdown.

It's also worth pointing out that the CBOE Volatility Index, often referred to as the "investor fear gauge," spiked about four points, or 29.0%, on Friday to 17.40--its highest level since the U.S. presidential election on November 8, 2016.

Reviewing Friday's batch of economic data, which included the Employment Situation report for January, the final reading of the University of Michigan Consumer Sentiment Index for January, and Factory Orders for December:

Employment Situation
January nonfarm payrolls increased by 200,000 while the Briefing.com consensus expected an increase of 180,000. The prior month's increase was revised to 160,000 from 148,000. Nonfarm private payrolls rose by 196,000 while the Briefing.com consensus expected an increase of 175,000. The previous month's increase was revised to 166,000 from 146,000.
The unemployment rate stayed at 4.1%, as expected.
Average hourly earnings increased by 0.3% (Briefing.com consensus +0.3%), while the previous month's increase was revised to 0.4% from 0.3%.
The average workweek was reported at 34.3 (Briefing.com consensus 34.5). The previous month's reading was left unrevised at 34.5.
Michigan Consumer Sentiment
The final reading of the University of Michigan Consumer Sentiment Index for January rose to 95.7 (Briefing.com consensus 95.0) from 94.4 in the preliminary reading.
Factory Orders
The Factory Orders Report for December showed an increase of 1.7% (Briefing.com consensus 1.3%), while the November reading was revised to +1.7% from +1.3%.

On Monday, investors will receive the ISM Services Index for January at 10:00 AM ET.

Nasdaq Composite: +4.9% YTD
S&P 500: +3.3% YTD
Dow Jones Industrial Average: +3.2% YTD
Russell 2000: +0.8% YTD

Week In Review: Pulling Back

Stocks tumbled this week, denting their impressive 2018 gains; the Dow Jones Industrial Average dropped 4.1%, the S&P 500 slid 3.9%, and the Nasdaq lost 3.5%.

While investors had a lot of news to digest, including President Trump's first State of the Union address, a tech-heavy batch of fourth quarter earnings, and the Employment Situation report for January, the selling was more so a natural response to a market that's moved too far too fast--although, a spike in Treasury yields did help strengthen a case for the bears.

Technology names dominated this week's batch of earnings, with Apple (AAPL), Microsoft (MSFT), Facebook (FB), and Alphabet (GOOGL) reporting their fourth quarter results, which were mostly better-than-expected. However, the companies' shares settled the week mostly lower; MSFT, GOOGL, and AAPL shares lost 2.4%, 5.8%, and 6.4% for the week, respectively, while FB shares advanced 0.2%, touching a new all-time high.

Apple reported above-consensus earnings on in-line revenues, but iPhone sales for the holiday season came in weaker than expected, and the company lowered its sales forecast for the first three months of 2018. Meanwhile, Facebook beat earnings and revenue estimates and reassured investors that its ad business would remain highly profitable despite changes to its news feed, which have prompted users to spend less time on the site--about 50 million hours less per day (in aggregate).

As for the others, Microsoft reported above-consensus earnings and revenues on the back of its rapidly-growing cloud computing business, while Alphabet, the parent company of Google, missed earnings estimates--despite beating revenue forecasts--largely due to rising costs.

Outside the technology space, Amazon (AMZN) and Boeing (BA) also reported their quarterly results this week. Amazon ended with a weekly gain of 2.0% after blowing past earnings estimates--thanks in part to changes in the U.S. tax code--while Boeing jumped 1.7% after also soundly beating earnings estimates, beating revenue estimates, and issuing much better-than-expected guidance for fiscal year 2018.

In other corporate news, the health care sector struggled this week, losing 5.1%, after Amazon (AMZN), Berkshire Hathaway (BRK.A), and JPMorgan Chase (JPM) announced on Tuesday that they will be partnering to form a company focused on reducing health care costs for hundreds of thousands of their U.S. employees.

In Washington, President Trump delivered his first State of the Union address on Tuesday evening. The president stayed on script, calling for a $1.5 trillion infrastructure plan and a compromise on immigration that would allow a path to citizenship for "Dreamers" in exchange for his promised barrier along the Mexico border and added border security. Mr. Trump also noted that lowering prescription drug prices is a top priority of his administration and took a firm, but relatively calm, stance against North Korea.

Meanwhile, Fed Chair Janet Yellen wrapped up her time at the Federal Reserve on a rather uneventful note as the Federal Open Market Committee unanimously voted on Wednesday to leave the fed funds target range unchanged at 1.25%-1.50%, as expected. In its statement, the central bank said near-term risks to the economic outlook appear roughly balanced, but added that officials are keeping an eye on inflation, which has been slow to pick up despite a tightening of the labor market.

The policy directive did little to change the market's rate-hike expectations; the CME FedWatch Tool still points to the March FOMC meeting as the most likely time for the next rate-hike announcement, with an implied probability of 77.5% (up from 74.7% last week), and calls for an additional two hikes before the end of the year.

On the data front, investors received the Employment Situation report for January on Friday: Nonfarm payrolls came in better-than-expected (+200,000 actual vs +180,000 Briefing.com consensus), average hourly earnings hit estimates (+0.3% MoM), and the unemployment rate stayed at 4.1% as expected. U.S. Treasuries were lower for the week ahead of the report's release, but extend their losses in the aftermath, sending yields to multi-year highs.

The yield on the benchmark 10-yr Treasury note spiked 19 basis points to 2.85% this week, its best level since January 2014, while the 2-yr yield climbed two basis points to 2.14%, its best level in nearly a decade--dating back to the financial crisis. The recent rise in Treasury yields--the 10-yr yield has climbed 50 basis points in seven weeks--is seen by some as a positive sign for economic growth, but it could also be a headwind for equities, which are trading at very high valuations.