Can stocks continue to advance with ‘softer’ economic news?

Posted by | June 6, 2017 | Newsletters | No Comments
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Last week, the S&P 500, Dow, and NASDAQ closed at all-time record highs.1 The S&P 500 rose 0.96%, the Dow gained 0.6%, and the NASDAQ grew by 1.54%.2 Meanwhile, the MSCI EAFE gained 1.64% for the week.3

Despite strong equity markets, bond yields dropped to their lowest point in the year.4 The drop in yield caused by rising bond prices, combined with soft employment numbers and low wage growth, could suggest a slowing economy or a tightening labor market.5

While the U.S. equity markets advanced to new highs and bond prices rose, other markets were mixed for the week. Pending home sales dropped 1.3% in April, a second straight month of decline.6 Oil fell to $47.66 a barrel, the dollar dropped to a seven-month low against the euro, and gold gained 0.8% closing at $1,280.20.7

Additionally, soft employment numbers and flat wages could lead to a disappointing Q2 Gross Domestic Product (GDP). With an eye on dropping inflation, the Fed will have to decide whether to still raise interest rates.8

Mixed Job Numbers and Slow Wage Growth

May’s job growth reported an anemic 138,000, well below the expected 185,000. At the same time, average hourly wages increased on a year-over-year basis by only 2.5%. Moreover, the revisions to March and April’s payroll numbers fell by 66,000 jobs.9 The economy is currently averaging 162,000 new jobs per month for the year—again, well below 2016’s 187,000 average.10

Despite the unemployment rate falling to 4.3%, the lowest it’s been in over 15 years, the employment-to-population ratio also fell. Still, the data confirms that demand for experienced and skilled workers exists, while the supply is falling.11

Fed Will Discuss Raising Interest Rates

On June 14, the Fed FOMC will meet to determine if an interest rate increase is in order.12 Despite the soft employment numbers and an inflation rate below the Fed’s target of 2%, traders still believe there is a nearly 88% chance that the Fed will raise rates in June.13 However, the market consensus currently suggests only a roughly 50/50 chance for another rate increase before the end of the year.14

International News and Looking Ahead

Manufacturing in China has posted strong returns. Both the manufacturing and non-manufacturing PMIs reported gains above 50. The numbers suggest that China is on track to reach its targeted 6.5% growth for the year.15 This matters because China is the world’s second largest economy at $11 trillion GDP for 2017.16

Other developments in the international arena could influence markets going forward. Reaction to President Trump’s decision to leave the Paris Climate Accord could adversely affect American products in the international markets. The landmark decision also runs the risk of hurting U.S. tech and alternative energy companies.17

We will continue to follow developing international and national news as they move the markets. As always, if you have questions about how these events may affect your finances, please contact us. We are here to help you remain informed and in control of your financial future.

I’m so very proud of my son, Connor Mahoney, who once again made the cover of the Journal News sports this past Sunday. Connor pitched an amazing game against the #1 rated high school in Class C.

Connor and his team now head upstate for the NY Finals, with the Championship game on Saturday.

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Sources

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2014 Emerald Connect, LLC