Stocks Weaken as Employment Numbers Loom

The S&P 500^® index (SPX) and other major benchmarks pulled back from a sharp rally over the past month as Treasury yields climbed and investors marked time ahead of key employment numbers later this week. The Nasdaq Composite^® (COMP) closed at a two-week low.

Investors await a handful of job market reports this week, capped by the Labor Department's Employment Situation report Friday morning, that are expected to factor into Federal Reserve policy and the direction of interest rates in 2024. Analysts expect job creation to accelerate slightly in November, with Nonfarm Payrolls projected to come in around 180,000 from 150,000 in October, according to Trading Economics.

Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research, said stock prices in general were a "bit stretched to the upside or overbought" in the wake of last month's rally.

"Throw in a slight uptick in Treasury yields, and you get a modest pullback, though small-cap stocks are clearly exhibiting some relative strength," Nathan said.

Here's where the major benchmarks ended:

• The S&P 500^® index (SPX) was down 24.85 points (0.5%) at 4,569.78; the Dow Jones Industrial Average^® (DJI) was down 41.06 points (0.1%) at 36,204.44; the Nasdaq Composite (COMP) was down 119.54 points (0.8%) at 14,185.49.
• The 10-year Treasury note yield (TNX) was up about 4 basis points at 4.264%.
• The Cboe^® Volatility Index (VIX) was up 0.45 points at 13.08.

Technology and communications services shares were among the weakest performers Monday, with the Philadelphia Semiconductor Index (SOX) dropping 1.2%, its lowest level since mid-November. By contrast, many smaller companies held up better. The small-cap-focused Russell 2000^® Index (RUT) rose 1% and ended at a three-month high, extending a recent upswing. In other markets, gold futures (/GC) plunged after earlier posting an intraday record above $2,152 an ounce.

Nathan added that the 4,600 level remains "key resistance" that the S&P 500 failed to crack last week. He also noted that starting about the middle of last week many investors appeared to be rotating into "value" or underperforming sectors, which may reflect beliefs that the Fed will hold off on further hikes and rates are trending lower.

"How long the rotation lasts, we don't know," Nathan explained. "But the investor reasoning may go along the lines of, 'if' the Fed is done, rates are trending lower, and a soft landing for the economy appears possible, shouldn't the underperforming small caps deserve some attention, if even as a 'catch-up' trade?"

Stocks on the move

The following companies had stock price moves driven by quarterly earnings, analyst ratings, or other news:

• Alaska Air Group (ALK) plunged 14% after the carrier said it agreed to buy Hawaiian Airlines (HA) for $1.9 billion. Alaska Air will pay $18 per share and take on $900 million in debt as part of the deal. Hawaiian Air’s parent Hawaiian Holdings surged 193%.
• Carvana (CVNA) rallied 14% after JPMorgan upgraded the online auto retailer from "underweight" to "neutral," citing the company's progress cutting costs and increasing productivity.
• General Motors (GM) rose 2.2% after Mizuho analyst Vijay Rakesh upgraded the automaker from "neutral" to "buy," citing factors like the recent end of the United Auto Workers strike.
• Lululemon Athletica (LULU) fell 1.3% after Wells Fargo downgraded the athletic apparel company from "overweight" to "equal weight," saying it recommends taking "chips off the table" following the stock's gains so far this year.
• Spotify Technology (SPOT) surged 7.5% after the music streaming company announced plans to lay off 17% of its workforce.
• Uber Technologies (UBER) rose 2.2% after S&P Dow Jones Indices said Friday the ride-sharing company will join the S&P 500 along with Builders FirstSource (BLDR) and Jabil (JBL).
• United Rentals (URI) fell 2.3% after KeyBanc downgraded United Rentals from "overweight" to "sector weight," saying "it could be difficult to maintain positive nonresidential construction start trends into 2024."
• Virgin Galactic Holdings (SPCE) tumbled nearly 18% following a Financial Times report Sunday in which British billionaire Richard Branson ruled out further investment in the space travel company.

Companies expected to release earnings this week include homebuilder Toll Brothers (TOL), which is scheduled to report Tuesday. Thursday brings numbers from enterprise software company Broadcom (AVGO), discount retailer Dollar General Corp. (DG), and Lululemon. Friday includes results from Darden Restaurants (DRI).

Jobs data key to direction

This week's job numbers follow a recent string of relatively subdued inflation readings that appear to have the market convinced the Fed won't need to boost rates again in its current tightening cycle. Investors have increasingly leaned toward the view that the Fed's next rate move will be a cut during the first half of 2024.

However, any stronger-than-expected jobs figures could send bond yields higher and force investors to quickly recalibrate their Fed expectations.

Friday’s employment report "will be important for market direction," said Collin Martin, director of fixed income strategy at the Schwab Center for Financial Research. "An upside surprise could pull up Treasury yields given how sharply they’ve fallen lately. An as-expected payroll increase, combined with lower-than-expected wage gains, "would be welcomed by the market as it makes a soft landing more likely," he added.

The first round of labor data comes Tuesday with the October Job Openings and Labor Turnover Survey (JOLTS). The report took on more significance in recent years thanks to the Fed's focus on slowing jobs and wage growth to bring inflation down. Job openings stayed high in recent months, but other labor market metrics slowed, so the question is whether that showed up in October's JOLTS data.

JOLTS could pull back to 9.35 million in October from the 9.553 million recorded in September, according to analyst estimates collated by Trading Economics, but anything above 9 million will likely be considered elevated. Even 9 million is about 50% above pre-pandemic levels. As always, the "quit" rate of the report is another key element because it can indicate whether workers feel comfortable leaving jobs to find new ones. A drop in quits might indicate a tighter jobs picture.

Late Monday, futures traders pegged chances at nearly 100% of the Federal Open Market Committee (FOMC) holding its benchmark funds rate steady following its December 12–13 meeting, according to the CME FedWatch Tool. The market is pricing in a 53% chance that the Fed will cut rates 25 basis points by its March meeting.