Weekly Market Commentary

The Markets

What will the Federal Reserve do now?

There was unexpected economic news last week. On Friday, the Bureau of Labor Statistics announced 224,000 new jobs were added in June, which was more than analysts had anticipated. The gains were offset a bit by reductions in April and May employment estimates. However, overall, the pace of jobs growth during second quarter was fairly consistent with jobs growth during the first quarter, reported Matthew Klein of Barron’s.

Strong employment numbers invigorated some investors. As a result, the Standard & Poor’s 500 Index, Dow Jones Industrial Average, and Nasdaq Composite finished the week near record highs.

Not everyone was jumping for joy, however.

The performance of the bond market continued to indicate some investors are worried about the possibility of recession. The yield curve remained inverted last week with the 10-year Treasury note trading at lower yields than 3-month Treasury bills. Yield curve inversions have been harbingers of recession in the past, reported Ben Levisohn of Barron’s.

Weekly Market Commentary

The Markets

Everything went up – and that’s unusual.

Randall Forsyth of Barron’s explained, “Like our major political parties, the stock and bond markets seem to live in two different worlds these days. The former sits at record levels, suggesting we live in the best of all possible worlds. The latter sees things as bad and only getting worse.”

Here’s what happened last week:

The Federal Open Market Committee met last week (they decide whether the central bank of the United States should push rates higher or move them lower). It left rates unchanged, but indicated a willingness to lower rates in support of economic expansion. That was music to the ears of some investors and the Standard & Poor’s 500 Index rose to a record high, reported Sue Chang and Mark DeCambre of MarketWatch.

Weekly Market Commentary

The Markets

Are we on the cusp of change?

The United States is doing quite well. Randall Forsyth of Barron’s reported:

“…the U.S. economy and stock market both seem to be doing better than OK, thank you, as the expansion and bull market celebrate their 10th anniversaries. Unemployment is around the lowest level in a half-century. The worst thing seems to be that inflation continues to run slightly below the Fed’s 2 percent target, a problem that might strike some as similar to being too rich or too thin.”

The economic facts are encouraging, but recent events have potential to knock the U.S. economy off its tracks. The most significant threat may be a second round of oil tanker explosions in the Gulf of Oman. The U.S. accused Iran and Iran denied responsibility, reported The Economist. Tensions in the region are on the rise.

Weekly Market Commentary

The Markets

Surprise! It was a great week for markets.

Since the U.S.-China trade conflict resumed in early May, investors have been off balance. The possibility of escalating tariffs on Mexico heightened economic uncertainty. Then, last week’s unemployment report arrived with less than stellar news – just 75,000 jobs were created in May. The number was well below expectations. The Bureau of Labor Statistics revised March and April employment numbers downward, too.1, 2, 3

 

We know investors hate uncertainty. So, why did major U.S. indices rally?

The answer may be hope. There was hope negotiations with Mexico would produce results and tariffs would be avoided. There was hope trade issues with China, in tandem with less-than-stellar economic news, would encourage the Federal Reserve to cut rates. There was hope lower rates would stimulate the economy and lift share prices higher.

Weekly Market Commentary

The Markets

U.S. stocks have had a great run.

During the past decade, the profitability of U.S. companies increased rapidly. Strong corporate earnings helped the U.S. stock market outperform markets in other nations by a significant margin. According to Capital Economics, “Since the start of this decade, the average annual return from the MSCI USA index of mid- and large-capitalization U.S. equities, which closely tracks the S&P 500, has been roughly 13 percent. This compares to only 7 percent from the MSCI World ex USA index of comparably-sized equities in 22 other developed economies.” Performance was measured in local currency.

Through the end of April, year-to-date returns for U.S. benchmark indices were soaring. T. Rowe Price reported, “Stocks recorded solid gains in April, continuing their strong start to the year. The S&P 500 and Nasdaq Composite Indexes hit new all‑time highs at the end of the month, while the other major benchmarks remained modestly below the peaks they established in the fall of 2018…Renewed confidence in the global economy seemed to be a primary factor boosting sentiment in April.”