Stocks could look past the weak labor report and focus on strong earnings

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Traders on the floor of the New York Stock Exchange, June 18, 2021.

Source: NYSE

After a weak labor market report, strategists say investors may focus on strong earnings growth rather than other potential negative factors.

Stocks were mixed for the week leading up to the long Labor Day weekend, with the Nasdaq outperforming, the S&P 500 rising slightly and the Dow flat. The best performing sectors were on the defensive side, led by real estate funds, utilities, consumer staples and healthcare.

“You have that Labor Day effect. People are back from vacation,” said Art Hogan, chief marketing strategist at National Securities.

Hogan said investors expect trading activity to pick up as a result, but it usually remains slow over the shortened holiday week. Investors can gauge their summer performance and secure profits or add hedges.

“If you look back on the last five weeks after Labor Day, which has happened with the market near all-time highs, the week after Labor Day is the worst for September,” Hogan said.

August’s disappointing job report – with only 235,000 new jobs added – dampened sentiment, but stocks were mixed.

“My outlook for the past few weeks has been sideways to moderately higher, and that seems where they’re going. Not a lot of bearish data is accumulating. In the worst case scenario, we’re going sideways,” said Randy Frederick, Charles Schwab managing director of Handel und Derivatives.

Frederick said even with concerns about weaker jobs and Covid-19, investors could continue to focus on profits. Economists blamed the spread of the Covid Delta variant for the weaker than expected job report.

Strategists say other topics for stocks in September could include Congress efforts to pass infrastructure laws and possible new taxes.

Ignore job report

Frederick said he anticipates the market will look beyond August’s employment report, which was about 500,000 fewer than expected.

“I don’t think the next week will spill over for the most part,” he added. “The markets are a bit in the red, but I think they took better than you might expect.”

Thursday’s weekly unemployment claims data could be even more important than usual due to the huge failure in the August employment report. Job data is important because this is an area where US Federal Reserve chairman Jerome Powell said he would like more improvements before the central bank can decide to slow its bond purchases.

The market is fixated on the move by the Fed to end its $ 120 billion monthly bond purchase program as it is seen as a precursor to interest rate hikes. However, Powell has emphasized that the two are not related.

“When it feels like [the jobs report] is putting the announcement of a cut back to the November meeting instead of the September meeting, and that was largely consensus, “Hogan said.

Hogan said the market will also monitor any inflation-related data, which makes the producer price index important on Friday after its surge last month. Even more important for the market is the consumer price index, which will be published the following week.

John Briggs, Head of Macro Strategy at NatWest Markets, said markets would be on the lookout for Fed-related headlines following the disappointing job report.

“You have next week [New York Fed President John] Williams speaks. His attitude will be important. He is considered to be closely related to Powell, ”said Briggs. Williams will speak on the economy at a briefing on Wednesday.

What’s next for stocks

The next big event for stocks besides the Fed will be the third quarter earnings season, which begins in early October. Before doing this, investors will be on the lookout for company comments on the results.

Frederick said the strength of earnings drove stocks and may continue to do so. The market was so overvalued for a while until the gains caught up, but the gains have been spectacular and now valuations are not as high as they were a few months ago so we can do that, ”he said.

According to Refinitiv, earnings are expected to grow 29.8% in the third quarter after an impressive 95.6% increase in the second quarter.

“There is a vacuum of earnings-related news,” said Frederick, noting that the market could be affected by geopolitical events in the meantime.

But even if the market loses momentum, he doesn’t expect a big sell-off as dip buyers continue to come for now if the market hits a setback.

The S&P 500 ended the week up 0.6% at 4,535, versus the Nasdaq’s 1.5% rise to 15,363, a new high. The Dow was flat 0.2% at 35,369.

The closely watched 10-year government bond yield was 1.32% late Friday, just above what it was a week ago.

Calendar for the week in advance

Monday

Labor Day

Tuesday

Merits: Coupa Software, Casey’s general store

10:00 a.m. Quarterly Financial Report

Wednesday

Merits: Grain Ferry, Lululemon Athletica, GameStop, AeroVironment

7:00 am Weekly mortgage applications

10:00 a.m. JOLTS

1:10 p.m. New York Fed President John Williams

2:00 p.m. Fed’s Beige Book

6:00 p.m. Dallas Fed City Hall, Robert Kaplan

Thursday

Merits: Hovnanian Enterprises, American Outdoor Brands, Sumo Logic, Zscaler, Verint Systems, Dave & Buster’s

8:30 a.m. unemployment claims

10:00 am Q2 Quarterly Services

11:05 a.m. Chicago Fed President Charles Evans

2:00 p.m. Dallas Fed Chaplain, Boston Fed President Eric Rosengren, and Minneapolis Fed President Neel Kashkari

Friday

Merits: Kroger

8:30 a.m. PPI

10:00 a.m. wholesale