Stocks tumble on weak jobs data, slowing global growth fears

The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go. – Benjamin Graham

After posting solid gains in the first two months of the year, the stock market succumbed to profit-taking last week as fears about slowing global economic growth resurfaced. Stocks closed lower for the fifth consecutive day on Friday and the major stock averages all fell at least 2% for the week. Although there is still widespread optimism that a trade agreement between the U.S. and China will eventually be reached, investors are beginning to become skeptical the longer the talks go without a deal. The markets expect a deal by the end of March but there still has been no date set for a summit meeting between President Trump and Chinese President Xi Jinping. With patience wearing thin, it was also announced last week that the U.S. trade deficit increased nearly 20% in December and was at a 10-year high, reflecting record deficits with China, Mexico and Europe. The deficit with China in 2018 was $419 billion and was partly due to a strong U.S. economy and a stronger dollar which made foreign goods cheaper to buy. China reported weak export data, too, as tariffs were having a negative effect. The European Central Bank (ECB) and President Mario Draghi also sounded an alarm about growth in the euro zone as it left interest rates unchanged and cut its economic growth forecast for 2019. The ECB announced new measures to support its economy, including new loans to European banks, and forecast no rate increases until at least the end of the year. The news wasn’t much better in the U.S. as the February employment report showed that only 20,000 new jobs were added to the economy, far fewer than the 180,000 new jobs that were forecast. This was the fewest number of new jobs in 17 months. The report wasn’t all bad, though, as the unemployment rate dropped to 3.8%, the lowest level in a year, and wage growth registered its biggest gain since 2009. While the headline jobs number was certainly a shock, the 3-month trend for job gains has still been very solid. The U.S. economy may indeed be slowing, but there are no visible signs that it is on the brink of a recession.

Last Week

The government shutdown in late January has made it difficult to get a true picture of the U.S. economy since economic data has been delayed. Much of the data has also been mixed and last week was no exception. While construction spending was much worse than expected in December, new home sales in December were better than expected and rose to a 7-month high. The ISM non-manufacturing or services sector index in February also rose and exceeded expectations, indicating that economic conditions are improving after the government shutdown. The productivity of the U.S. workforce rose at its fastest pace in the fourth quarter since 2015.

The Energy Information Administration (EIA) reported that crude oil inventories spiked last week, which sent crude oil prices tumbling to $56 a barrel.

For the week, the Dow Jones Industrial Average lost 2.2% to close at 25,450 and the S&P 500 Index also dropped 2.2% to close at 2,743. The Nasdaq Composite Index declined 2.5% to close at 7,408.

This Week

Inflation data for February should be benign as the producer price index (PPI), the consumer price index (CPI) and import prices are all expected to increase only modestly. January retail sales are forecast to be flat after declining in December while January durable goods orders are expected to drop slightly after increasing in December. February industrial production is forecast to rebound after posting a weak reading in January and the University of Michigan consumer sentiment index for March should remain strong.

Like the ECB, the Bank of Japan (BOJ) is expected to leave its benchmark interest rate unchanged at negative 0.1% when it makes its monetary policy decision this week.

Among the most notable companies scheduled to release fourth quarter earnings reports this week are Casey’s General Stores, Dollar General, Ulta Beauty, Williams-Sonoma, Dick’s Sporting Goods, Wageworks, Oracle, Adobe Systems and Broadcom.

Portfolio Strategy

With a dismal U.S. jobs report, weak China trade data and slower growth forecast in Europe, it’s no wonder the stock market closed lower each day last week. The drumbeat of bad news continued all week and culminated on Friday when the government announced one of the smallest increases in jobs since the current economic expansion began. It’s entirely possible that the polar vortex in February along with the government shutdown may have skewed the employment report. After all, layoffs have been near 50-year lows and job openings are at record highs, conditions that don’t normally result in the number of new jobs falling off a cliff. Nevertheless, a softening labor market only adds to other weaker than expected economic data and points to much slower growth in the first quarter. While the extent of the slowdown is unclear, some of the weak economic reports are likely to be revised higher, owing to the effects of the government shutdown. Despite the biggest increase in wage growth in ten years, inflation is low and should remain that way, which is what producer and consumer price data should confirm this week. Interest rates have fallen and the yield curve has flattened (the difference between the 2-year Treasury and the 10-year Treasury is only 17 basis points) but it has not inverted, which is a telltale sign of a recession. As long as the labor market continues to add jobs, wages keep rising and inflation remains under control, the economic expansion looks healthy enough to continue for at least the balance of the year.