Exceptional jobs data helps mask market volatility

US stocks rose slightly last week, masking a violently volatile opening week to the year on Wall Street. The bungee-cord action is likely to continue this week, especially if there are any developments in trade negotiations.

Surprisingly soft data in both the US and China have raised the stakes for negotiations between the two nations scheduled for this week. As delegations prepare to flesh out the deal struck between Presidents Donald Trump and Xi Jinping on Jan 7 and Jan 8 in Beijing, they may hold the fate of the decade-old bull market in their hands.

For now, the market mood is skewed towards optimism, but skittishness persists after the worst December performance for major indexes in decades. Ever a wild card, the Trump administration has become even more unstable, vowing an indefinite partial government shutdown as Mr Trump goes all-in in his fight with the Democratic House over a border wall.

The Dow Jones Industrial Average slid 660 points on Thursday after some of investors' December fears were realised. In the US, the Institute for Supply Management's survey of factory activity showed its most marked deceleration since the onset of the Great Recession in 2008.

"More than likely we will see the manufacturing data snap back in the new year. It will really snap back if the US and China lay the ground work for a trade truce," said Phil Flynn, senior market analyst at the Price Futures Group, in a note to clients.

Corroborating the macroeconomic data, Apple took the almost unprecedented step of lowering its revenue projection for the quarter, citing weak demand in China. The warning caused shares to drop by more than 10 per cent, wiping out tens of billions of dollars of market value. Nor is Apple likely to be the last US multinational to experience this pain. Many major American companies, from restaurateur Yum Brands to jet maker Boeing, have credited the Chinese market for much of their growth in recent years.

The other shock came from China, where factory activity reportedly shrank to the greatest extent since 2017.

These reports momentarily convinced investors that the December selloff was a rational discounting of an economic slowdown rather than an irrational panic - as stock bulls had maintained.

But Friday's developments raised the possibility that stock market volatility was a false alarm after all. US employers added 312,000 workers to payrolls in December, nearly doubling the average economist prediction. Now the bears were wrongfooted, questioning the analysis that US economic growth had passed its peak. The Dow Jones recovered Thursday's losses, adding 746 points in all.

Economists at brokerage Bank of America Merrill Lynch Global Research called the jobs report "exceptional".

"Today's report points to continued strength for consumer spending going forward," said BOA Merrill Lynch economists. "Strong job gains coupled with rising wages should act as a tailwind for consumption. Additionally, the decline in gasoline prices helps to support consumption."

"To us, wage growth is the most important metric to watch in jobs data these days, especially as recessionary fears increase and anxiety around Federal Reserve (Fed) policy remains high," said John Lynch, chief investment strategist at brokerage LPL Financial, in a note to clients.

Gains after the jobs report were moderate at first, likely because of the implications of wage growth for interest rates. Inflation often shows up first in wage data and the central bank has promised to be responsive to such data. But Federal Reserve Chairman Jerome Powell, speaking publicly after the jobs report, hinted that the central bank was not yet concerned about inflation and would remain "patient" with rate hikes. His comments echoed those of Dallas Fed President Robert Kaplan, who advocated waiting until it becomes clear whether the market rout had foreshadowed any economic slowdown before proceeding with the planned rate hike cycle.

Some slowdown in corporate earnings growth is inevitable: for one thing, rising wages tend to crimp earnings.

"Average hourly earnings grew 3.2 per cent year over year in December, the fastest pace of the cycle," said Mr Lynch. Still, that growth rate was "below excessive levels that have historically preceded economic recessions".

Other major US corporations may echo Apple's sales or earnings warning as first-quarter earnings reporting season approaches.

Still, the bulls have the momentum in the short term, if only because the stock market works like a bungee rope. The speed of the drop in December has made big rebounds like Friday's likely to continue, even if the major indexes - like bungee jumpers - never regain their former heights.

Portfolio strategists at brokerage BOA Merrill Lynch described the behaviour of global stocks in 2018 as "Apocalypse Dow". As former Fed chairman Ben Bernanke said, the recent scare is still a blip compared with the 2008 financial crisis, and yet, according to the Bank of America strategists US$20 trillion of stock market value has been wiped out in the last 12 months.

The record-breaking flight of money from stock mutual funds in December was consistent with "capitulation", the washout that typically happens before markets turn around again, the Bank of America strategists said.