The major domestic equity indexes closed out the day on Friday mixed, as optimism from a rise in January job growth was offset by a weaker-than-expected outlook from Amazon that battered retail stocks. Amazon fell 5.38 percent after its quarterly sales forecast fell short of Street estimates, overshadowing its record sales and profit during the holiday season. Those results put the Nasdaq in negative territory

Walmart, Macy’s and Kohl’s were also down more than 2 percent each. The S&P consumer discretionary index fell 1.77 percent.

A Labor Department report showed nonfarm payrolls rose by 304,000 jobs last month, the largest gain since February 2018 and exceeding expectations for an increase of 165,000.

That report, along with better-than-expected ISM manufacturing activity numbers for January, pointed to underlying strength in the economy despite an uncertain outlook that has left the Federal Reserve wary about more interest rate hikes this year.

Even as the economy remains on a stable footing, there is concern that a slowdown overseas could hurt earnings growth, with high-profile companies such as Apple warning of slower demand in China.

The most recent data appeared to indicate that China’s manufacturing sector contracted in January for the second straight month, heightening risks for global growth amid a trade war with United States.

The S&P 500 rose 1.6 percent for the week and the benchmark index is up 8 percent so far in 2019 but remains 8 percent below its record high close on Sept. 20, 2018. The Dow added 1.3 percent for the week and the Nasdaq gained 1.4 percent.

During Friday’s session, Exxon Mobil Corp and Chevron Corp rose more than 3 percent apiece after the oil majors reported better-than-expected earnings, sending the Dow higher. Also helped by higher oil prices was the S&P energy index, which rallied 1.83 percent,

Cigna Corp slid 2.88 percent lower after the health insurer forecast 2019 revenue and earnings below estimates.

Approximately 7.5 billion shares changed hands on the major domestic equity exchanges, as compared to the 7.7 billion share average over the past 20 trading days.

Job Growth

 January saw employers hiring the most workers in 11 months, pointing to underlying strength in the economy despite a darkening outlook that has left the Federal Reserve cautious about further interest rate hikes this year.

The Labor Department’s closely watched monthly employment report indicated on Friday that there was no discernible impact on job growth from a 35-day partial government shut down. However, the shutdown was likely responsible for the unemployment rate increasing a seven-month high of 4.0 percent.

The report came two days after the Fed signaled its three-year interest rate hike campaign might be ending because of rising headwinds to the economy, including financial market volatility and slowing global growth.

Looking at the data, nonfarm payrolls rose by 304,000 jobs last month, the largest gain since February 2018, the Labor Department reported. Job growth saw gains in hiring at construction sites, retailers and business services as well as at restaurants and hotels.

Meanwhile, November and December data were revised down to show 70,000 fewer jobs created than previously reported. The economy needs to create roughly 100,000 jobs per month to keep up with growth in the working-age population.

The government shutdown saw about 380,000 workers furloughed. However, Trump signed a law guaranteeing these employees back pay. As a result, these workers were included in the January payrolls count in the survey of employers.

The furloughed workers were, however, considered unemployed on “temporary layoff” in the separate household survey from which the jobless rate is calculated. This pushed up the unemployment rate by one-tenth of a percentage point from 3.9 percent in December.

Average hourly earnings rose three cents, or 0.1 percent in January after accelerating 0.4 percent in December. That left the annual increase in wages at 3.2 percent.

With key data from the Commerce Department, including the fourth-quarter gross domestic product report, still delayed because of the government shutdown, the employment report is the strongest evidence yet that the economy remains on solid ground.

The Fed on Wednesday kept interest rates steady but said it would be patient in raising borrowing costs further this year. The U.S. central bank removed language from its December policy statement that risks to the outlook were “roughly balanced.”

Clouds have been gathering over the economic expansion, now in its ninth year and the second longest on record, with business and consumer confidence deteriorating in recent months. Confidence has been eroded by the fight over the government budget and Washington’s trade war with Beijing.

Other headwinds to the economy include the fading gains from a $1.5 trillion tax cut, slowing growth in China and Europe, as well as the risk of a disorderly departure by Britain from the European Union.

With its January employment report, the government published its annual “benchmark” revisions and updated the formulas it uses to smooth the data for regular seasonal fluctuations. It also incorporated new population estimates.

The government said the level of employment in March of last year was 1,000 jobs lower on a seasonally adjusted basis than it had reported. The shift in population controls had no impact on the unemployment and labor force participation rates.

Job growth increased broadly in January. Employment at construction sites surged 52,000, the most since February 2018, after increasing 28,000 in December. Hiring was likely boosted by mild temperatures in January.

Manufacturing payrolls increased by 13,000 jobs, slowing from December’s 20,000 job increase. Employment in the leisure and hospitality sector jumped by 74,000 jobs. Retail payrolls rebounded by 20,800 jobs. Professional and business services employment increased by 30,000 jobs last month.

The government added 8,000 jobs last month. The average workweek was unchanged at 34.5 hours in January.

Consumer Sentiment Surprises

Consumer sentiment fell by less than forecast after the longest government shutdown in American history, suggesting the impact of the closure may be abating.

The University of Michigan’s final January sentiment index fell to a two-year low of 91.2, though that was higher than the forecast in a Bloomberg survey that had called for the reading to be unchanged from the preliminary reading of 90.7. 

The measure of current conditions was weaker than the initial reading while the expectations gauge strengthened somewhat.

Key Insights 

  • Confidence remains relatively elevated compared with historical levels, though it’s at the lowest since Trump was elected.
  • The gauge may recover in coming months as the government returns to business after the five- week closure.
  • “While consumers became somewhat more optimistic about the outlook for the national economy, they viewed current economic conditions slightly more negatively due to the worse-than- anticipated impact of the shutdown on the economy,” Richard Curtin, director of the University of Michigan consumer survey, said in a statement. “The typical impact of such ‘crisis’ events is short lived.”
  • Expected income gains for the year ahead matched the average during the past year.
  • A measure of buying conditions for long-lasting goods was the weakest in five months, while gauges measuring attitudes about the economic outlook in the next year and five years slumped.
  • Consumer expectations for inflation in the year ahead held at 2.7 percent, unchanged from the prior month and a year earlier. The inflation rate over the next five to 10 years was seen at 2.6 percent, up from 2.5 percent a month and a year earlier.

Interviews for the report were conducted Jan. 2-28. The shutdown ended Jan. 25.

Earnings Concerns

Corporations are exceeding consensus expectations this earnings season, but to a smaller degree than normal, and S&P 500 companies are now barely expected to eke out an increase in profits for the first quarter of 2019.

The trend underscores fear over a potential decline in earnings this year, even as equities are closing out their best January in more than three decades, with the S&P 500 index rebounding its sharp decline late last year.

Fourth-quarter earnings are estimated to be up 15.5 percent from a year ago, based on results from nearly half of the S&P 500 companies and forecasts for the rest, according to IBES data from Refinitiv, compared with about 14.5 percent three weeks ago.

The rate is noticeably slower than the three earlier quarters in 2018, when the Trump administration’s corporate tax cuts fueled double-digit earnings gains. Estimated profit growth for all of 2018 is at 23.6 percent, based on Refinitiv’s data.

Also, given recent historical trends in earnings rates, investors might expect growth to be on track to rise even faster at this point in the reporting period.

The quarterly profit growth rate typically falls heading into a reporting period and then quickly reverses course once companies begin to report, often beating analysts’ expectations.

So far this earnings season, the percentage by which companies are beating estimates for the entire S&P 500 is 2.8 percent, compared with a median of 5.4 percent over the past eight quarters, using Refinitiv’s data.

If the index was exceeding estimates by the recent median, fourth-quarter profit growth would now be estimated at 17.4 percent instead of 15.5 percent, said David Aurelio, senior research analyst at Refinitiv.

The inability of the financial sector to meaningfully outdo earnings expectations is at least partly to blame for the slower-than-usual pickup in the growth rate, he said.

With results in from 66 percent of the S&P 500 financials, the sector’s median earnings surprise is just 0.4 percent. That’s on track to be well below the sector’s 4.4 percent median surprise of the last eight quarters.

Also affecting the fourth-quarter’s growth rate, profit estimates for the energy sector were still falling in recent weeks, following a 38 percent drop in crude prices in the fourth quarter.

Meanwhile, the percentage of reports exceeding expectations for the fourth quarter – 70.9 percent – so far is below the 78 percent average of the past four quarters, based on Refinitiv’s data.

Estimated first-quarter earnings growth has fallen to just 0.7 percent from 3.5 percent about three weeks ago, as the benefits from the tax cuts recede.

First-quarter forecasts for the energy and technology sectors have fallen the most, with expectations for year-over-year energy earnings falling to 10.8 percent in the first quarter and those for technology dropping 5.4 percent.