Equities rallied late Friday afternoon, despite disappointing September employment data. Shares initially lost ground after the Bureau of Labor Statistics reported the economy only added 142,000 jobs in September and revised job growth from July and August lower. The slowdown is primarily due to job creation in mining and manufacturing sectors, particularly in oil drilling. Market losses were pared back substantially by mid-day and saw respectable gains by the closing bell. For the day, the S&P 500 gained 1.43 percent, while the Nasdaq rose 1.74 percent. The Dow Jones Industrial Average returned 1.23 percent.
Earlier in the week the Atlanta Federal Reserve GDP Now model cut its growth forecast for the third quarter in half, to 0.9 percent. The drop in the forecast was due to a larger than expected trade deficit. Under the Keynesian GDP model, any rise in the trade deficit regardless of the source, reduces GDP growth. Likewise, a decrease in the trade deficit increases GDP growth. Since the U.S. is a trade deficit nation that imports consumer goods, the deficit often rises with consumption when growth is strong. Conversely, a weak economy, such as in 2008, can lead to a drop in the trade deficit and an increase in the GDP growth estimate, as Americans buy fewer imported goods. Nevertheless, other economic reports have been solid, particularly consumption data.
The close of the third quarter marked a tough period for equities. The S&P 500 Index fell 6.9 percent from June 30 to September 30. One of few sectors that gained ground was utilities, which, in addition to being a defensive sector, benefited from falling interest rates. Real estate rallied as well, for the same reason. At the other end, materials and energy were the largest losers, falling more than 7 percent each. Concern over growth in China plus the decision to devalue the yuan pulled commodity prices lower.
Relative to the S&P 500, there were four sectors besides utilities that beat the index: industrials, technology, consumer discretionary and consumer staples. Consumer staples is another defensive sector, which would explain outperformance. As mentioned above, the consumer sector has been strong thanks to rising consumption. Strength in the consumer discretionary sector is one of the brightest spots in the economy and market at the moment. A significant earnings beat by Nike (NKE) also helped to propel the sector. This past week, Costco (COST) also exceeded its earnings estimates.
Biotechnology has struggled mightily over the past few weeks, with shares dipping further over this past week, however the sector was up today, with SPDR Biotechnology (XBI) rising 4.89 percent. Shares of XBI are nearly 40 percent off their 2015 high, but remain up for the year. Higher volatility is typical of biotechnology and investors should remain patient when holding this relatively aggressive sector.