- October's 271,000 payrolls gain the biggest this year
- Odds for December Fed interest rate increase rise to 68%
U.S. stocks erased declines in the final hour of trading as the biggest monthly surge in payrolls this year boosted optimism on the economy, even as the Federal Reserve prepared to raise interest rates.
Sharp gains in bond yields and the dollar separated the session’s biggest winners and losers in equities. Banks rallied as investors bet rising rates will help boost profits, while utilities in the S&P 500 fell the most since August as the group’s dividend payout becomes less attractive compared to Treasury yields. Energy shares followed oil lower as a stronger currency reduces the appeal of dollar-denominated commodities.
“People need to prepare for a December rate hike,” said John Canally, chief economic strategist at LPL Financial Corp. in Boston. “I’d expect the probability of a December liftoff to go to the low 90s unless something really bad happens between now and then. There’s no soft spot in the economy, that’s over. Things are tightening all around.”
The Standard & Poor’s 500 Index slipped less than 0.1 percent to 2,099.20 at 4:01 p.m. in New York, after earlier losing 0.8 percent. The Dow Jones Industrial Average added 46.90 points to 17,910.33, after erasing a 95-point slide. Goldman Sachs Group Inc. and JPMorgan Chase & Co. combined to contribute more than 60 points on the Dow. The Nasdaq Composite Index climbed 0.4 percent as semiconductors rallied on results from Qorvo Inc. and Nvidia Corp.
Data today showed 271,000 jobs were added in October, exceeding the 185,000 predicted in a Bloomberg survey of economists. Wage growth accelerated and the jobless rate fell to 5 percent, a seven-year low. In the wake of sluggish job gains the prior two months, last month’s advance allays concerns that an abrupt hiring slowdown would hinder the expansion’s progress as economies overseas strive to gain traction.
One of the Federal Reserve’s preconditions for raising rates is further improvement in the labor market, and the latest report showed diminishing slack as the number of Americans working part-time because of a weak economy fell to the lowest since 2008. Fed officials said in October that they would consider a rate increase at their next gathering, and Chair Janet Yellen this week reinforced the view by saying December was a “live possibility.”
Those comments from Yellen helped put the brakes on a rally that had carried the S&P 500 to within 1 percent of its record. The benchmark has risen as much as 13 percent from an August low, with gains in the past two months paced by a rebound in commodity shares after they led declines during a summer selloff sparked by worries that weakness in China’s economy would spread. The index closed Friday with a sixth consecutive weekly gain, extending its longest such streak this year.
Traders have shifted their bets on a December rise in rates, now pricing in a 68 percent chance the central bank will move at next month’s meeting, up from 56 percent before the jobs report and as low as 27 percent last month.
In remarks today prepared in advance of the payrolls report, Fed Bank of St. Louis President James Bullard said a stronger labor market and reduced financial market stress are among the factors supporting the case for the Fed to raise rates. Policy makers will have one more monthly employment report to assess before their December meeting.
“The job gains in October were a blowout,” said Jim McDonald, the chief investment strategist at Chicago-based Northern Trust Corp., which oversees $946 billion. “We took advantage of the weakness of August and September to put money to work in the international markets and in high-yield. We seasonally would expect some strength through the end of the year, but the easy money had been made in the bounce back from the correction.”
Beyond the jobs data, the U.S. quarterly earnings season is drawing to a close. About 74 percent of S&P 500 companies have beaten earnings estimates, while only 44 percent have topped sales forecasts. Analysts estimate profits dropped 3.8 percent in the third quarter, up from predictions for a 6.1 percent decline two weeks ago.
“There will also be an earnings drag as rate speculation leads to a stronger dollar, which will weigh on corporate top-line growth,” said Chad Morganlander, a money manager at Stifel, Nicolaus & Co. in Florham Park, New Jersey, which oversees about $170 billion.
Walt Disney Co. rose as much as 3.3 percent after its earnings topped analyst estimates amid stronger profits from its cable networks and movies. Cable networks surprised investors as a highlight, as they lifted profit by 30 percent.
Qorvo, a communications chipmaker, surged 23 percent after its profit beat estimates. Nvidia rose 14 percent after its fourth-quarter revenue outlook exceeded analysts’ estimates. Stamps.com Inc. soared 38 percent to its highest since the dot-com bust after boosting its 2015 revenue and profit view. TripAdvisor shares fell 6.9 percent after its third-quarter sales missed expectations.
Six of the S&P 500’s 10 main industries declined Friday, with utilities falling 3.6 percent, the steepest slide since August. Consumer staples lost 1.1 percent. Banks led financial companies higher while semiconductors bolstered technology shares.
Reynolds American Inc., Philip Morris International Inc. and Colgate-Palmolive Co. -- all companies with substantial revenue overseas vulnerable to a stronger dollar -- fell at least 2 percent. Coca-Cola Co. lost 0.9 percent, and Campbell Soup Co sank 3.2 percent. The stronger greenback can weigh on American multinational companies’ profits when their overseas earnings are converted back to the U.S. currency.
Kraft Heinz Co. lost 4.5 percent to lead the retreat among consumer staples. The food giant reported a drop in sales and profit for its first quarter since being created in a merger orchestrated by billionaire Warren Buffett and 3G Capital.
“Multinational companies are going to continue to have a hard time, so we’re concentrating on companies that have U.S.-centric revenue streams,” said Mark Spellman, a fund manager who helps oversee $4.2 billion at Alpine Funds in Purchase, New York. “We’ll continue to look for financials that will benefit from higher rates.”
Goldman Sachs and JPMorgan Chase added at least 3 percent, the best performers in the Dow, on optimism for stronger profits. Bank of America Corp. and KeyCorp jumped more than 3 percent. The KBW Bank Index gained 2.7 percent and posted its best week since February. Charles Schwab Corp. rallied 6.2 percent, and E*Trade Financial Corp. advanced 5 percent to a four-month high.
The Chicago Board Options Exchange Volatility Index fell 4.8 percent to 14.33. The measure of market turbulence known as the VIX is hovering near its lowest since August after its biggest monthly drop ever in October. About 7.8 billion shares traded hands on U.S. exchanges, 4 percent above the three-month average.