MarketView for October 22

Summary

Wall Street saw another positive day on Tuesday, with the S&P 500 index reaching yet another record high, after weaker-than-expected job creation last month reinforced expectations the Federal Reserve will hold the course on its economic stimulus into next year. The gains marked the fourth straight record close for the benchmark S&P index.

Employers added 148,000 workers last month, well below the 180,000 economists had expected. The data was seen as supporting the Fed's decision to maintain its $85 billion in monthly bond purchases, which has been a major factor in the S&P 500's rally this year of 23 percent.

For now the evidence appears to reinforce the idea that the Fed will refrain from scaling back its easy money policy, which has kept borrowing costs low, until the middle of next year. The central bank surprised market participants in September when it held off on any plans to trim its stimulus.

However the performance of the Nasdaq was a bit of a disappointment after some of the year's largest gainers, including Netflix, reversed course to move lower. Netflix fell 9 percent to $323.12, giving back gains that followed the release of the company's earnings report on Monday. With more than 17 million shares traded, volume was nearly eight times the average over the last 50 days. Apple fell 0.3 percent to $519.87. However, there was some recovery after the company unveiled a new line of iPads.

Consumer staples was among the best performing of the S&P sectors, the result of a 4.2 gain in Kimberly-Clark, which ended the day at $102.97 after the company chlked up a larger than anticipated quarterly earnings number.

Transocean rose 6 percent to $49.35 after S&P Dow Jones Indices announced the drilling services company will replace Dell in the S&P 500 index after the close of trading next Monday. Shares of VMware were up 2.8 percent to $85, again as a result of higher-than-expected earnings.

According to Thomson Reuters data through Tuesday morning, of the 128 companies in the S&P 500 that have reported earnings, 63.3 percent have exceeded Street expectations, roughly in line with what has happened since 1994 but below the 66 percent rate over the past four quarters. On a revenue basis, 52.3 percent of companies in the S&P 500 that have reported results have exceeded Street expectations, short of the 61 percent rate since 2002 but slightly above the 49 percent rate over the past four quarters.

Fed officials will meet next Tuesday and Wednesday to discuss monetary policy. The consensus is that the Fed will hold off on scaling back economic stimulus until next year.

Job Growth Weak

Employers added far fewer workers than expected in September, suggesting a loss of momentum that will likely add to the Federal Reserve's caution in deciding when to trim its monthly bond purchases. According to the Labor Department, nonfarm payrolls rose by 148,000 workers last month. While the job count for August was revised higher, employment gains in July were revised lower and were the weakest since June 2012.

The good news is that the unemployment rate dropped a tenth of a percentage point to 7.2 percent, the lowest level since November 2008. The closely watched employment report was released more than two weeks later than originally scheduled because of the partial shutdown of the federal government earlier this month.

Signs the economy lost steam even before the acrimonious budget fight could convince the Fed to hold off any decision on scaling back its bond-buying stimulus until the extent of the economic damage from the fiscal standoff is clear.

It is estimated that the 16-day government shutdown reduced the annualized fourth-quarter gross domestic product by as much as a 0.6 percentage point because of reduced government output and damage to both consumer and business confidence.

Government payrolls increased by 22,000 jobs after rising by 32,000 in August. Both state and local governments added jobs last month, offsetting a decline in federal employment.

The data showed surprise weakness in the leisure and hospitality industry, which has been adding jobs consistently over the past years. The industry lost 13,000 jobs, the most since December 2009.

The information sector failed to recoup all the jobs lost in August, when the motion picture industry shed workers, with payrolls only rising 4,000 last month.

But there was good news in the construction industry, where payrolls increased 20,000. Construction employment had barely increased over the prior two months, and the gain in September could ease fears of a leveling off in home building.

Those concerns could be further allayed by a separate report from the Commerce Department showing construction spending at a near 4-1/2-year high in August as outlays on both private and public projects increased solidly.

In September, the manufacturing sector added a meager 2,000 jobs as automobile assemblies shed some positions. Retail employment increased 20,800, slowing somewhat from the solid gains seen for much of this year.

Average hourly earnings increased three cents in September. They have risen 49 cents or 2.1 percent over the past 12 months. The length of the average workweek held steady at 34.5 hours.

Construction Spending Up Sharply

Construction spending hit a near 4-1/2 year high in August, the result of increases in both private and public outlays, a hopeful sign for third-quarter economic growth. Construction spending increased 0.6 percent to an annual rate of $915.1 billion, the highest level since April 2009, the Commerce Department said on Tuesday. Construction spending in July was revised to show a 1.4 percent rise instead of the previously reported 0.6 percent gain.

The report was originally scheduled for release on October 1 but was delayed after the federal government was partially shut down because of a fight over the budget. The 16-day shutdown ended last Wednesday.

Construction spending in August was lifted by a 0.4 percent rise in public construction projects. That was the fourth consecutive month of gains and came even as federal government spending on construction projects tumbled. However, there was an increase in spending on private construction projects, which increased 0.7 percent to its highest level since January 2009.

Private residential construction spending rose 1.2 percent to a five-year high, showing little sign that high interest rates were slowing activity. Part of the increase in residential construction spending reflected home improvement projects.