A lower-than-expected increase in non-farm payrolls dragged the markets lower on Friday, but gains made earlier during the week ensured a finish in the green for the benchmarks. The report comes at a time when investor confidence in the economic recovery was beginning to grow. Investor sentiment now clearly depends on the earnings season that will unofficially kick-off next Monday.
The Dow Jones Industrial Average (DJIA) shed 0.5% to settle at 12,657.20. The Standard & Poor 500 (S&P 500) finished at 1,343.80, dropping 0.7%. The Nasdaq Composite Index dropped 0.5% to close at 2,859.81. The fear-gauge CBOE Volatility Index (VIX) ended almost flat at 15.95 and is down roughly 30% from its mid-June high. Volumes remained tight, as consolidated volumes on the New York Stock Exchange, AMEX and Nasdaq, were 5.95 billion shares compared with last year’s daily average of 8.47 billion. On the NYSE, for every stock that advanced, more than two stocks declined. Gains earlier during the week helped to ensure benchmarks notched up a second consecutive week of gains and the Dow, S&P 500 and Nasdaq were up 0.6%, 0.3% and 1.6%, respectively, for the week.
Most of the gains during the week can be attributed to positive economic reports, with job reports playing a significant role. On Thursday, favorable reports from Automatic Data Processing (ADP) and the Labor Department brought cheer to investors. The ADP National Employment Report said employment in the non-farm private business sector had soared by 157,000 from May to June on a seasonally adjusted basis, almost double of what economists had expected. Separately, the US Department of Labor reported seasonally adjusted initial claims for the week ending July 2 had declined by 14,000 to 418,000 from the previous week’s revised figure of 432,000. Following the positive reports, not only did the markets climb higher, many economists raised their projections for non-farm payrolls and estimated gains in the range of 125,000 to 175,000.
However, the Labor Department disappointed the economy as it reported that nonfarm payroll employment had increased by only 18,000, against the consensus expectation of an increase of 96, 000. The U.S. Bureau of Labor Statistics stated: “Total nonfarm payroll employment was essentially unchanged in June (+18,000). Following gains averaging 215,000 per month from February through April, employment has been essentially flat for the past 2 months. Employment in most major private-sector industries changed little in June, while government employment continued to trend down”. At the same time, unemployment has increased to 9.2%, from 9.1% in May, and is at its highest level since December 2010.
Separately the Department of Commerce reported a hike in domestic wholesale inventories and stated: “Total inventories of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations but not for price changes, were $456.3 billion at the end of May, up 1.8 percent (+/-0.4%) from the revised April level and were up 15.5percent (+/-1.1%) from a year ago”. Economists had projected a 0.7% increase in wholesale inventories in May.
Investors will wait anxiously for the earnings season to provide respite and lift the markets higher, as Alcoa, Inc. (NYSE:AA) kicks-start the year’s third earnings season. This week will also see important earnings reports from bellwethers like Google Inc. (NASDAQ:GOOG), JPMorgan Chase & Co. (NYSE:JPM), Citigroup, Inc. (NYSE:C), Marriott International, Inc. (NYSE:MAR), and these stocks were down 2.7%, 1.4%, 1.4% and 1.0%, respectively, on Friday.
On Friday, bank stocks were one of the biggest laggards and the Financial Select Sector SPDR (XLF) fund traded 1.3% lower. Bank stocks including Bank of America Corporation (NYSE:BAC), Wells Fargo & Company (NYSE:WFC), The Goldman Sachs Group, Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS) dropped 2.0%, 1.3%, 0.7% and 3.0%, respectively.
