Jobs and ISM Score a Touchdown

The Dow Jones Industrial Average closed out January on a high note, up 7.17% for the month. That was the index’s largest one-month gain since 2015 and biggest January gain in 30 years. A monster jobs report, healthy corporate earnings, and indications from the Federal Reserve signaling it would remain patient in hiking interest rates helped lead the index to its sixth consecutive weekly gain. Further fueling optimism on the Street was the strength of the January report on manufacturing from the Institute for Supply Management (ISM). The report painted a bright picture of the U.S. manufacturing sector despite slowing global economic growth and trade tensions.

Jobs Smash Estimates

A government shutdown couldn’t keep businesses down in January. For the month, businesses added 304,000 to the payrolls. That crushed estimates from Dow Jones economists of 170,000. The unemployment rate rose slightly to 4%, but this was likely a temporary symptom from the shutdown according to the Labor Department. Job growth was broad-based with education and health services adding 55,000 to the payrolls, construction up 52,000, and professional and business services adding 30,000. Despite global trade winds, manufacturers also managed to add 13,000 to their payrolls. The much-watched wage number also showed workers continued to see their paychecks rise, with wages up 3.20% year-over-year. Overall, the report was very strong, demonstrating businesses still remain confident enough to invest in their people despite the market’s own concerns over a potential slowdown.

U.S. Manufacturers Sweep Up

Headwinds from slowing global economic growth and trade failed to keep U.S. manufacturers down in January. After slipping to 54.3 in December, the ISM’s manufacturing index rose to 56.6 in January. Numbers above 50 indicate expansion in the manufacturing sector, while numbers below 50 indicate contraction. The report showed new orders picked up sharply in January, reversing December’s decline. Production and employment also managed to post increases for the month. Growth was broad-based with fourteen of the 18 U.S. manufacturing industries surveyed by the ISM expanding in January. Perhaps the most encouraging aspect of the report was that the ISM estimates the manufacturing index looks like it can stay in a range between 54% and 56% this year, signaling moderate expansion in the manufacturing sector.

Fed Hits Pause

The Federal Reserve continued its campaign to soothe markets, announcing it will continue to be patient in hiking rates at this week’s Federal Open Market Committee Meeting. Markets had grown concerned in December that the central bank was tone deaf to the growing risk to the U.S. economy of slowing global economic growth as it continued to stress additional rate hikes and the shrinking of its balance sheet. This week, the central bank not only announced it would hold interest rates steady at a range of 2.25% to 2.50%, but also that it was prepared to make adjustments to its shrinking balance sheet in light of economic and financial developments. The Fed also went further, announcing it was prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved by only reducing interest rates.

Strong nonfarm payrolls and manufacturing numbers reaffirmed there is momentum remaining in the U.S. economy. These were just the latest in a series of data rebuking the “sky is falling” mentality seen during Q4. Strong data is one thing, but equally important to the market’s bounce has been an overall shift in sentiment. Investors are coming back around to the idea that the U.S. economy indeed continues to expand despite the global risks. Add to this a Fed who continues to reiterate its message that it will remain patient in hiking interest rates and that stands ready to act to support the economy if global conditions begin to impact U.S. economic fundamentals and you get an entirely different outlook from investors. It’s tempting to want to adopt the “so goes January, so goes the year” optimism after the month we have had, but there are still a lot of wild cards in the deck with both China trade talks and Brexit on the horizon. Brexit’s potential outcomes unquestionably skew negative for the markets, but China, being the larger of the two events for the U.S. economy, has the potential to be a significant catalyst if resolved.

The Week Ahead