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Posted on May 6, 2019

Weekly Market Commentary May 6, 2019

Market Commentary

The news in the last seven days has challenged the hopes and assumptions of some investors. Many hoped the Federal Reserve would signal an interest rate was likely this year to combat weak inflation reports. The Fed signaled a cut is unlikely if growth remains decent in the press conference following the meeting. Assumptions the economy is slowing are common, yet the U.S. economy continued to add new jobs. Earnings, once feared to have shrunk from one year ago, look likely to come in unchanged to barely higher.

Key Points for the Week

  • The U.S. economy continues to produce a high number of new jobs and the unemployment rate reached the lowest level in the last fifty years.
  • The Federal Reserve held rates steady and communicated odds of an interest rate cut this year were lower than many investors anticipated.
  • Over the weekend, the President announced potential new tariffs on Chinese goods as trade negotiations between the two countries took a negative turn.

Over the weekend, the U.S.-China trade negotiations, which were widely assumed to be headed for a deal, took a step back as President Trump announced additional tariffs. Assumptions were the trade negotiations were going well and a deal would be announced soon. If negotiations move in the other direction, it is very possible stocks could react sharply.

Declining odds of an interest rate hike pushed markets lower mid-week, but the employment report shot markets higher. For the week, the S&P 500 edged 0.2% last week and the index reached another all-time high when dividends are included. The global MSCI ACWI gained 0.3% as international and the Bloomberg BarCap Aggregate Bond Index dropped 0.1%.

U.S. Employment and the Federal Reserve

The April employment revealed a robust labor market continuing to create new jobs. In April, the U.S. added 263,000 jobs, exceeding expectations by 73,000 jobs. At the beginning of the year, there were concerns on if the U.S. could continue adding jobs at the pace it did in 2018 with an average month-over-month jobs added at 223,000 jobs. The most recent report boosted the 2019 average to just under 205,000 jobs a month, easing concerns after the weak January jobs report.

The unemployment rate fell to 3.6%, the lowest in 5 decades. As the chart shows, unemployment hasn’t been this low since 1969. Only the tech bubble created a better labor environment. However, much of the unemployment rate decreasing 0.2% from the previous month is due to 500,000 people leaving the labor force. The population that has jobs or is actively seeking jobs lowered to 62.8% from 63% suggesting excess capacity to draw in workers.

us unemployment rate
Early in the week, the Federal Reserve decided to keep the federal-funds rates unchanged at 2.25% – 2.5%. Despite a strong jobs report and other economic reports displaying a sense of U.S. resiliency, inflation remains low. Fed Chair Jerome Powell reiterated a wait and see mentality but if continued weak inflation data persists, a rate cut could be likely. Current market odds for at least one cut this year are 50%.Wage growth came in slightly below expectations with year-over-year wage growth at 3.2% and expectations at 3.3%. Wages have stagnated since breaking through the 3% threshold. The data suggest wages may not be a key determinant in overall inflation data going forward.

The broad outlook for the economy and rates remains unchanged. The economy remains relatively strong is outperforming the pessimistic assumptions that pervaded markets in last part of 2018. Recession risk is being pushed further down the road. Given strong economic data and low inflation, the Federal Reserve remains unlikely to adjust rates.

Fun Story

Talk Is Not Cheap Anymore

Ramon Guico, the mayor of Binolonan a small town in the Philippines, decided to ban gossip. The reasoning behind the new law is an effort to enhance the quality of life for its residents. Law breakers, if caught, could be fined up to $14 or be ordered to pick up trash in the neighborhood. A council leader in the town confirmed no one has been punished a second time.