- Stocks move up as jobs report trounces expectations. U.S. equities are significantly higher in early trading, following the release of the latest Employment Situation Report, which showed that employers added 255,000 jobs in July versus an expected 170,000, though unemployment remained at 4.9%. Yesterday’s session was low on both volume and movement, an unexpected reaction given the Bank of England’s surprisingly bold stimulus package. The major averages finished mixed, with 6 of the 10 sectors closing lower and technology the biggest mover, up 0.6%. In Asian markets, the Nikkeiclosed flat, and ended a disappointing week down more than 2%, while the Shanghai Composite moved lower by 0.2%. European stocks are reacting positively to the jobs report, with major indexes up around 1%. Finally, Treasuries are being hit, as the yieldon the 10-year note has shot up 0.07% to 1.56%, as is COMEX gold, which is down 1.5%.
- Solid July jobs report. Brexit? What Brexit? Looking back, it’s now pretty clear that the weak readings on jobs in April (144,000) and May (24,000) were indeed payback for a warm winter, distortions from a late spring break, and a strike at a major telecom carrier. Job growth over the past three months, year to date, and over last 12 months is averaging right around 200,000, more than enough to tighten the labor market, as well as push up wages and ultimately inflation. The Federal Reserve Bank (Fed) will take notice of this report. The U.S. economy added 255,000 jobs in July, far exceeding the consensus estimate, as tallied by Bloomberg News, of 170,000. The June number was revised up from 287,000 to 292,000. The unemployment rate ticked up to 4.9% in July from 4.8% in June, but that rise occurred for the “right reasons” as the labor force increased. Average hourly earnings rose 2.6% year over year in July, in-line with expectations and the June reading, and this reading is probably the most disappointing aspect of an otherwise solid report. As we noted in our latest Weekly Economic Commentary, there is a narrow path to a September rate hike by the Fed, and this report is on that path, but a December hike is more likely.
- Fear the Fed? Today’s strong jobs report is being highly scrutinized because of how it may influence the Fed. We’ve pointed out a number of times that stocks have historically done well after the initial Fed rate hike of an economic cycle. Did we already get this bounce? In a sense we have: the S&P 500 is up 7.4% since the Fed hiked rates on December 16, 2015. The average post-WWII gain in the S&P 500 in the year following the first rate hike of an economic cycle is 8%. That suggests stocks may end the year about where they are now, consistent with our Midyear Outlook 2016. But the bias may be to the upside: the average gain for stocks during the more gradual Fed rate hike cycles–which this one clearly is–has been higher at over 13%.
- Weak manufacturing in core Europe. Factory orders came in weaker than expected in Germany, declining -0.4% versus expectations of a 0.5% gain. In a related piece of data, Italian industrial production fell -0.4% versus the expectation of a 0.3% gain. These are all post-Brexit data, and reflect, at least in part, continued uncertainty about the European economy. Overall, the market is not sensitive to these pieces of data individually, but they do paint the backdrop of a struggling economy.
- Week ahead. Next week, the summer doldrums kick in, as it’s a quiet week for the Fed and the only economic reports of note are the June Job Openings and Labor Turnover Survey (JOLTS) report and the July retail sales data. It’s equally quiet in Europe next week; but it’s a busy week in China, as it begins to report its July activity and inflation data. There are a few second tier central bank meetings next week (Mexico, South Korea, Philippines) but the most important one is likely to be the Reserve Bank of India’s meeting on Tuesday.
- Employment Report (July)
- Indonesia: GDP (Q2)
Click Here for our detailed Weekly Economic Calendar
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.
Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.
High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.
Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.
Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.
Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.
Technical Analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results. Technical Analysis should be used in conjunction with Fundamental Analysis within the decision making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs are examples.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor
Tracking # 1-523277