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Despite weak jobs report, S&P 500, Nasdaq close at record highs

The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. – Warren Buffett

The stock market continued its winning ways last week as both the S&P 500 Index and the Nasdaq Composite Index rose to close at new record highs despite a much weaker than expected employment report in August. The Dow Jones Industrial Average bucked the trend, however, and closed modestly lower as economically sensitive stocks were weaker due to a resurgence in the number of cases of the Delta variant of Covid-19. The S&P 500 wound up gaining 2.9% in the month of August and posted total return of 21.5% on a year-to-date basis through August 31st. It was the seventh consecutive monthly gain for the benchmark, which has more than doubled from its low back in March 2020, the beginning of the pandemic. The primary focus for the market last week was the August employment report, which showed that only 235,000 new jobs were created, well below the 750,000 that were expected. The unemployment rate edged lower to 5.2% from 5.4%, which was in line with estimates. Both June and July job totals were revised significantly higher, though, which helped alleviate some of the disappointment. The weaker than expected jobs numbers were likely due to the impact of the Delta variant and probably pushed out the Federal Reserve’s timetable to announce their tapering plans. This could explain the muted reaction of the stock market as investors were willing to look past the poor jobs report since cases of the Delta variant appear to be peaking in many parts of the country. Although the market is experiencing peak earnings growth at this time along with very easy monetary policy, even if economic growth and earnings growth slow, the environment should still be positive for stocks as interest rates are likely to remain low for the foreseeable future.

Last Week

Other jobs data released last week was mixed as ADP reported that private payrolls in August increased by 374,000, far less than the 600,000 estimate, while weekly jobless claims were 340,000 compared to expectations of 345,000, the lowest level since March 2020. The ISM manufacturing index for August was better than expected as orders remained strong and the ISM services sector index was in line with estimates with a number above 60, which is considered exceptional. The consumer confidence index in August fell to its lowest level since February due to concerns about the spread of the Delta variant of Covid-19 and worries about higher inflation.

For the week, the Dow Jones Industrial Average fell 0.2% to close at 35,369 while the S&P 500 Index gained 0.6% to close at 4,535. The Nasdaq Composite Index jumped 1.6% to close at 15,363.

This Week

The only important economic report to be released this week is the producer price index (PPI) for August, which is expected to show a healthy increase but be about half of the 1% increase reported in July.

The Federal Reserve releases its beige book, which summarizes the current economic conditions across all of the 12 Federal Reserve districts. The European Central Bank (ECB) announces its monetary policy decision and is expected to leave its key interest rate unchanged.

With second quarter earnings season all but over, only a handful of companies are scheduled to report their earnings this week. Among the most prominent include GameStop, Casey’s General Stores, Lululemon Athletica and Kroger.

Portfolio Strategy

Despite a weak employment report in which the total number of jobs created in August missed estimates by over 500,000, the S&P 500 Index managed to hold its own and post a modest gain last week.  The stock market now enters the month of September, which historically has been the worst performing month of the year dating back to 1928 with an average loss of almost 1%. However, this year may be different. In years that have seen strong gains through the first half of the year, September tends to be positive and typically finishes the year with additional gains. That may be a tall order this year, though, as the S&P 500 Index is up over 20% through the close of business on Friday as second quarter earnings surged over 95% on a year-over-year basis. The stronger than expected earnings resulted in a stock market that is much less overvalued as the denominator in the price earnings (P/E) ratio increased, making valuations more reasonable. While earnings for the third quarter are expected to be far less, they still are forecast to grow by nearly 30%.  Third quarter earnings season will likely be the next major test for the stock market but that will not begin until the second week of October. In the meantime, the market will have to weather potential risks that could cause increased volatility and a possible pullback in stock prices. The S&P 500 Index has not experienced as much as a 5% correction this year and is long overdue for some type of pullback. One of these risks is inflation and investors will get a better read on it this week with the release of the producer price index (PPI). Other risks include the spread of the Delta variant of Covid-19, historically high equity valuations, a possible increase in the corporate tax rate and continued weakness in the labor market. Any of these potential land mines could create a bumpy ride for the stock market, but it’s possible stocks could finish the month with additional gains if history is a guide.