Market Update: Friday, February 5, 2016

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  • Stocks sustain late day gains, finish modestly higher. Indexes bobbed in and out of positive territory on Thursday as a number of catalysts pulled equities in opposite directions including: a volatile session for WTI crude oil, another round of mixed earnings reports, lackluster economic data, and dovish comments from another Federal Reserve Bank (Fed) President. In an unusual scenario of late, materials led the sector gains, while industrials also posted a solid performance as more dollar weakness eased concerns about currency headwinds facing the group. Meanwhile, COMEX gold tacked on another 1.1% while Treasury yields fell 0.04% to 1.85%. Final tallies: Dow +79.92 at 16416.58, Nasdaq +5.32 at 4509.55, S&P 500 +2.92 (0.15%) at 1915.41.
  • Stocks fall post jobs report. Equities quickly headed south following this morning’s nonfarm payrolls figures, which came in mixed, while Asian markets were mostly lower overnight as investors opted to wait on the sidelines ahead of the U.S. data; Japan’s Nikkei fell 1.3% and China’s Shanghai Composite was off 1.1%. European indexes moved lower after the jobs report but are off their lows heading into afternoon trading. Gold is falling and Treasuries are holding, as is the dollar amid its biggest weekly drop since 2009.

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  • Mixed January jobs report has something for everyone. The economy added 151,000 net new jobs in January 2016, below the consensus of estimates from economists polled by Bloomberg News (+190,000) and just above the low end of the range of consensus estimates (+140,000 to +260,000), and well below the 262,000 increase in December. Some of the downshift from December to January was likely weather related. As is the case every year, the January employment report contains revisions to the job count and wage data back to early 2015. As expected, wages were revised up and the job count was revised down modestly over the past year. In January, the unemployment rate dipped to 4.9% from 5.0%. This dip was considered healthy as the labor market increased and the labor market participation rate held steady.
  • The concern for the Fed–and for the market as well–could be the acceleration in wages. Average hourly earnings rose 2.5% year-over-year in January, and the revisions to the wage data show a clear acceleration in wage growth beginning in early 2015, when wages were just 1.5% year-over-year. So despite the downshift in job count in January, the economy has added an average of 229,000 jobs per month over the past three months and close to 200,000 per month over the past year, even after the revisions. Fed officials have told us that monthly job increases of between 125,000 and 150,000 on a sustained basis are enough to continue to tighten the labor market and drive up wages. Thus, while markets and pundits are talking recession, and a weaker dollar, the Fed sees a tightening labor market, and likely more rate hikes. The market doesn’t think the Fed will raise rates again until August 2017. Hopefully, Fed Chair Yellen will clarify the Fed’s stance at her semiannual monetary policy testimony to Congress next week.
  • Record drop for the U.S. dollar this week? The U.S. dollar has had a very rough week, down 3.2% as of Thursday. Of course this could change today after the jobs report, and is another sign of the amazing volatility we are seeing across all asset classes. Sparking much of the sell-off is a realization that a potentially weakening economy might limit the number of Fed interest rate hikes expected this year. This would be the largest weekly drop since May 2009. In fact, since 1980, the dollar has dropped this much in one week only 20 times. Technically, the dollar this week moved beneath its 200-day moving average for the first time since October as well.
  • Lunar New Year. Sunday marks the start of the New Year in Asia, ushering in the Year of the Monkey. Chinese markets will be closed all of next week, with other Asian markets closed for a few days and opening mid-week. China announced plans to open its capital markets even more to outside investors, a move largely ignored by markets. Mishandling of equity market regulations have soured many global investors on mainland equities, at least for now. With no news coming from China next week, the next key date on the calendar is the meeting of the People’s Congress, scheduled for the second week in March.

 

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Friday:

  • Employment Report (Jan)

Sunday:

  • China: Lunar New Year Holiday Begins
  • India: GDP (Q4)

Click Here for our detailed Weekly Economic Calendar

Important Disclosures

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

Treasury inflation-protected securities (TIPS) help eliminate inflation risk to your portfolio, as the principal is adjusted semiannually for inflation based on the Consumer Price Index (CPI)—while providing a real rate of return guaranteed by the U.S. government. However, a few things you need to be aware of is that the CPI might not accurately match the general inflation rate; so the principal balance on TIPS may not keep pace with the actual rate of inflation. The real interest yields on TIPS may rise, especially if there is a sharp spike in interest rates. If so, the rate of return on TIPS could lag behind other types of inflation-protected securities, like floating rate notes and T-bills. TIPs do not pay the inflation-adjusted balance until maturity, and the accrued principal on TIPS could decline, if there is deflation.

Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.

Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.

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High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.

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