It was one of those “good-news, bad-news” kind of weeks, as the stock market finished Friday and the week essentially flat and mixed. The “good news” was the jobs report, which showed 280,000 new jobs. That topped expectations of 210,000, and it also represented a nice uptick from April’s 221,000. Janet Yellen and the Fed must be thinking that maybe the economy really IS a lot stronger than the recent 0.7% GDP decline we saw. The Fed basically has a “green light” to raise rates in September, if it wants to, but the question is whether the Fed really wants to move in that direction.
This brings up the “bad news” side of the jobs report, and the week in general. What makes the “good” jobs report actually “bad” is that it speeds up the time frame for a rate hike. The wild card is how stock and bond markets will ultimately react to a Fed rate hike. Yes, a rate hike might be only 25 basis points, and it might not even happen until December or even 2016, but the odds are that the reaction to those hikes will not be good. Alan Greenspan’s warning of a “tantrum” is right on key with regard to how financial markets might react to the first rate hike in more than six years.
We saw the bond market this past week showing signs of concern, as the yield on the 10-year U.S. Treasury even rose enough to finish the week around the 2.4% level. Does this mean that the longer-term bond market is suddenly pricing in rate hikes or does it mean that the bond market is suddenly pricing in a less-accommodative Fed, which might not keep endlessly buying bonds? Long-term rates are still historically low, but this week’s pop in rates is a development that we will continue to watch very, very closely.
The tough part about seeing the 10-year U.S. Treasury yield rise is the fallout that it can create. Everything from car loans to business lines of credit and home mortgage loans are tied to the 10-year Treasury, and as rates rise, it could have a big spillover effect into the “real” economy. The opposite view on rising rates, though, is that interest rates on CDs, and money market and bank accounts will rise. Maybe it would have an offsetting effect. We shall see, but it really has been a long time since the subject of rising interest rates has been on investors’ minds.
As for the performance this week in the stock market, the bullish camp was disappointed. We have been holding tight near all-time highs, so seeing stocks finish essentially flat this week, despite the strong jobs number, was a letdown. In addition, bulls were not all that thrilled seeing the S&P 500 finish below 2,100, nor were they all that pleased seeing the Dow close out the week below 18,000. It was a plus, however, to see the Nasdaq continue to hold above 5,000.
As for potential “global shocks,” things were calm and quiet this week. Greece somehow postponed its big debt payment due date until the end of June, which was not much of a surprise. “Kicking the can down the road” is becoming synonymous with Europe and the ECB, so look for the June due date to extend out until 2016. The Greek news kept global markets calm, which was another plus that allowed global and U.S. financial markets to close out the week on a quiet note.
That said, the Gorilla wishes each and all a relaxing June weekend. It has been a challenging week, but it has also been a week without too much drama. The stock market is still in a multi-month, narrow trading range, and it still looks ready for a sizable breakout in either direction. The jobs numbers signaled that the economy is sound, so at least we do not seem as though we are heading toward recession.
On an unrelated and very fun note, the Belmont Stakes takes place today, and American Pharaoh has a shot at a Triple Crown. It seems completely unfair that he will have to run against some “fresh” horses, but the best to him. It is rare to think of race horses like stocks, but the Gorilla read that three-year-old American Pharaoh cost his owners $300,000 to buy, and win or lose tomorrow, he is now worth $20 million ($10 million in breeding rights alone)! Not a bad three-year performance for an investment in a very beautiful and fast-running horse. Again, have a great weekend, and we will be back in action on Monday!
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