Friends
We mentioned that this week would likely be one to remember with regards to economic data and volatility. It was. On the economic front we got a jobs number that was weaker than expected, 114,000 new jobs created in July vs. the 185,000 expected. The unemployment rate moved up to 4.3% which is the highest reading since October of 2021. Average hourly earnings were up .2% which was muted and fuels the narrative that inflation has been tamed. Now markets have turned their attention to the possibility/likelihood of a recession in the near future. As we mentioned yesterday market participants are concerned that the Fed is waiting too long to lower interest rates. Indeed, the market is doing it for them on the longer end. The 10-year Treasury note yield has dipped to 3.80%. Remember, the Fed Funds rate, which is what the Fed controls, is still 5.25% to 5.50%. In effect, the markets are not waiting for the Fed.
Now, let’s review for a moment. Is it a terrible thing that 114,000 new jobs were created in July? No, not really. Is a 4.3% unemployment rate a bad number? No, not really. In the past we would have considered that full employment. We just had a second quarter GDP reading at 3%. So why are markets so unsettled? It’s the direction of the move that is concerning investors, not necessarily the snapshot of where we are now. I have a thought that the Fed might want to consider (though they won’t). Why not just lower the Fed Funds rate to 3.75% in September? The market has already taken longer yields there. Of course, they won’t do that, but they might lower the Fed Funds rate 50 basis points in September instead of the quarter point cuts we were expecting.
All kidding aside the Fed has indicated for some time now that they will simply react to the data and not try to predict the data. But as you know, market participants can’t help themselves. So, market moves like we have seen this week should not surprise us. Indeed, how we allocate our portfolio assets prepares us for moments like this. We know that stocks don’t just go up and we also know that interest rates go up and down.
Anyway, I think the stock market is spooked by the violent move in the bond market. Bonds have rallied ferociously (remember as yields drop bond prices rise-hence the verbiage the bond market is rallying) signaling the belief that we are headed into more difficult economic times. As for stocks, by the close the Dow Jones Industrial Average was down 610 points to finish the day at 39,737. The S&P 500 was down 100 points to close at 5,346. The Nasdaq Composite Index was down 417 points to close at 16,776. Gold was down $1 to trade at $2,479 per ounce, while oil was down $2.42 to trade at $73.89 per barrel WTI.
Remember, bulls supposedly wanted rate cuts. What is scaring them is the speed at which the market is seeing that happen. But will rates falling on risk free returns cause investors to increase their risk profiles? That was a fancy way of saying will folks move out of falling short term fixed income (money market accounts and CD’s) and into stocks? Hey, I’ve been doing this for 40 years so l get to use the fancy verbiage once in a while. Or in other words, will falling interest rates in the long run be good for stocks? Obviously not yesterday or today, but longer term? Falling mortgage rates should be good for the various real estate markets. Anyway, we were expecting fireworks this week and we got them. Corporate earnings really weren’t good enough to offset weakening economic data. Let’s see what next week has in store for us. Stay tuned.
Have a great weekend everyone.
