U.S. July jobs report, the Dow and Q2 earnings

In this week’s edition of Market Week in Review, Todd LaFountaine, program director, advisor insights, chatted with Paul Eitelman, senior investment strategist, about the newly released U.S. jobs report for July, the Dow Jones Industrial Average’s new record high and results from second quarter earnings season.

Strong labor market continues in U.S.

The numbers provided by the U.S. Bureau of Labor Statistics for July were solid, Eitelman said: 209,000 jobs were added, which was ahead of industry consensus expectations—and the unemployment rate dipped to 4.3%. He pointed out that the labor market once again was an area of relative strength within the U.S. economy, which has experienced mediocre growth overall.

The bigger puzzle for investors and economists, Eitelman said, is the fact that a strong labor market hasn’t led to inflationary pressures. However, he does see a bit of strength in the latest U.S. wage growth numbers, which showed average hourly earnings rising 0.3% in July. “The wiggle from June to July was a little better than anticipated,” Eitelman remarked, calling it a “baby step” toward stronger price inflation going forward.

In the view of Eitelman and other Russell Investments strategists, the U.S. Federal Reserve is still unlikely to hike the federal funds rate through the rest of 2017—unless there are a couple of additional strong employment reports in the months ahead. If so, he thinks a December rate hike could creep back into the equation.

Dow hits record high—What may have driven it

The discussion turned to U.S. equities and the Dow Jones Industrial Average, which reached 22,000 for the first time ever on Aug. 2. In Eitelman’s view, there are two main factors that drove the Dow this high. One is a company-specific component: Because the Dow is a mega-cap index, when large companies (such as Apple this past week) report strong results, it’s reflected broadly.

The second factor, according to Eitelman, is favorable macroeconomic trends—such as low interest rates, which are helping to maintain expensive valuation levels. In addition, he believes the weakness of the U.S. dollar has also provided a lift. “Many large, mega-cap companies source a significant share of their revenues and earnings from abroad,” he explained. “So, as the dollar has weakened, that’s actually been a boost to their profitability.”

All that said, Eitelman and other Russell Investments strategists believe we are still in a late-cycle, momentum-driven market, and advise caution. While Eitelman does not see a recession on the horizon, he notes that U.S. equity valuations continue to be a big headwind for investors. He believes markets could still move higher, but that rich valuations increase the scope for a downside market correction.

Good news from second quarter earnings season

Switching gears to second quarter earnings season, Eitelman said the results have been quite good. The final earnings growth number for U.S. companies might come in near 10%, he noted—which would be slightly higher than his team’s original thinking of 8 to 9%.

As strong as the U.S. results have been, Eitelman pointed out that in general, non-U.S. earnings are even better. For instance, Europe has seen double-digits earnings growth in 2017, and emerging markets have improved significantly in recent months. Most interesting of all, Eitelman said, is Japan, which is on track for nearly 25% earnings growth.

Watch the video.