Mid-day: Market still playing defense

The S&P 500 is down 1.1%, as the market remains in a defensive mood after Russia seized Europe’s largest nuclear power plant in Ukraine. The Nasdaq Composite (-1.7%) and Russell 2000 (-1.9%) are underperforming for the second straight day while the Dow Jones Industrial Average trades lower by 0.8%.

The S&P 500 financials (-2.3%), information technology (-1.7%), communication services (-1.4%), consumer discretionary (-1.7%), and materials (-1.0%) sectors are leading the decline with losses ranging from 1.0% to 2.3%.

Growth stocks are taking it on the chin relative to the value stocks. The Russell 3000 Growth Index is down 1.5%, versus a 0.8% decline in the Russell 3000 Value Index.

The defensiveness can be shown in the positive performances of the utilities (+1.8%), real estate (+0.2%), and health care (+0.1%) sectors; the 11-basis-point decline in the 10-yr yield to 1.73%, which is resembling a flight to safety; and the 8.5% gain in the CBOE Volatility Index (33.07, +2.59).

The energy sector (+1.1%) is also up, but it’s struggling to keep pace with the larger gain in oil prices ($112.23, +4.56, +4.2%).

Understandably, the worsening geopolitical news has overshadowed the stronger-than-expected jobs growth indicated in the February employment report, which Chicago Fed President Evans (non FOMC voter) said will not change anything for the Fed in a CNBC interview.

Nonfarm payrolls increased by 678,000 (Briefing.com consensus 400,000), but the more noteworthy figure was the flat growth in average hourly earnings (Briefing.com consensus +0.5%). Given the inflationary environment, featuring $110-per-barrel oil, there are concerns that the stagnant wage growth will translate to less consumer spending.

Separately, better-than-expected earnings reports from Costco ( COST 535.93, -7.12, -1.3%), Marvell ( MRVL 63.44, -1.75, -2.7%), and Gap ( GPS 13.88, -0.37, -2.6%) are not getting the reactions shareholders had hoped for, but Broadcom ( AVGO 601.19, +22.58, +3.9%) is with a 4% gain.

Reviewing the employment report in more depth:

  • Hiring activity was strong in February, but wage increases were not. Nonfarm payrolls jumped by 678,000, yet average hourly earnings were unchanged. That left the year-over-year rate at 5.1%, down from 5.5% in January.
    • February nonfarm payrolls increased by 678,000 (Briefing.com consensus 400,000). The 3-month average for total nonfarm payrolls rose to 582,000 from 572,000. January nonfarm payrolls revised to 481,000 from 467,000. December nonfarm payrolls revised to 588,000 from 510,000.
    • February private sector payrolls increased by 654,000 (Briefing.com consensus 390,000). January private sector payrolls revised to 448,000 from 444,000. December private sector payrolls revised to 561,000 from 503,000.
    • February unemployment rate was 3.8% (Briefing.com consensus 3.9%), versus 4.0% in January. Persons unemployed for 27 weeks or more accounted for 26.7% of the unemployed versus 25.9% in January. The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 7.2%, versus 7.1% in January.
    • February average hourly earnings were unchanged (Briefing.com consensus 0.5%) versus a downwardly revised 0.6% increase (from 0.7%) in January. Over the last 12 months, average hourly earnings have risen 5.1%, versus 5.5% for the 12 months ending in January.
    • The average workweek in February was 34.7 hours (Briefing.com consensus 34.6), versus an upwardly revised 34.6 hours (from 34.5) in January. Manufacturing workweek increased 0.4 hours to 40.7 hours. Factory overtime increased 0.2 hours to 3.6 hours.
    • The labor force participation rate increased to 62.3% from 62.2% in January.
    • The employment-population ratio rose to 59.9% from 59.7% in January.
      • Some will paint the average hourly earnings figure as good news insomuch as it will temper some of the worries about inflation pressures broadening out due to rising wages and the Fed needing to take a more aggressive step toward removing its policy accommodation. However, it isn’t truly good economic news.
  • The key takeaway from the report is that real average hourly earnings are negative and that is likely going to adversely impact consumer spending activity in the face of escalating inflation pressures, which will be acute at the gas pump and in the grocery aisles. This report, then, is good for now, yet it may not translate later into as good of things for the economy and corporate earnings.