Bulls were hoping for some good economic news and a catalyst to head higher, and we got it in the form of a blow-out employment number of 287,000 for June that handily topped expectations of 173,000 as well as May’s dismal 11,000. Friday’s bounce left the S&P 500 back above 2,100 and the Dow above 18,000, and it had the bulls singing and dancing into the weekend. The major indices had a bumpy week, but when the closing bell rang yesterday, we had notched weekly gains of 1.1% for the Dow, 1.3% for the S&P 500 and 1.9% for the Nasdaq.
The monthly jobs number was the strongest monthly gain since 2009, and it erased fears that the U.S. was drifting toward recession. One month’s report does not guarantee that our economic worries are behind us, but it was impressive enough to allow investors to give a gigantic sigh of relief and put money back into the stock market. Granted that the unemployment rate did edge up to 4.9%, but it had already been expected to rise to 4.8% from May’s 4.7%. The main number was the number of jobs created, however, which was all it took to light the market’s fire.
We are now back above pre-Brexit levels for the stock market, and that is another plus as we head into the rest of the summer. The Brexit vote spooked global markets, and the S&P 500 fell by 5.3% following the late-June Brexit vote. It was touch-and-go as the S&P flirted with the 2,000 level, and a major market meltdown seemed a distinct possibility. Amazingly enough, though, the stock market bounced, and after a major rally, it just needed a reason to head higher, and the jobs report provided the fuel to lift the S&P 500 to 2,129; just points away from a brand new, all-time high!
As usual, though, good news can often lead to worries among the investor class. No sooner than we saw Friday’ impressive jobs report, there was talk that the report reopens the door to another Federal Reserve rate hike sooner rather than later. Investors were not all that worried on Friday, though, but rate hike concerns could easily put a lid on a breakout to new highs for the major indices. That is just how the game is played, though, so it will be interesting to see what the various Fed Heads will be saying in the days and weeks ahead. The main plus, however, is that the Brexit worries seem shelved, which is a big plus for the bullish camp.
Capital still seems a bit worried, though, and we continue to see money flow into the 10-year U.S. Treasury, whose yield closed out the week near its all-time low level of 1.36%. Even with a rejuvenated stock market, money flows into Treasuries are still keeping yields at historic lows. Bill Gross has recently said that $12 trillion in global bonds are yielding zero or less-than-zero interest rates. It shows that global capital is hiding and waiting for something that we might not yet expect or understand. The U.S. had a great day for stocks on Friday, but there are clearly still worries about potential “global shocks” around the rest of the world.
Gross has said that most economists and even the central banks are unable to figure out what these zero interest rate policies will ultimately do, but Gross did say that those policies are very unnatural and could be weighing on growth. The problem for central banks is how they return rates to more “normal” levels without rocking the global economic boat. This puts the U.S. Federal Reserve in a tough spot, because with the strong jobs report, the Fed has a “green light” to raise rates. This was unthinkable following the post-Brexit market meltdown, but the door is once again open if the Fed wants to push through a rate hike.
This sets the stage for a challenging and interesting summer, and when you add the backdrop of two contentious Presidential conventions, we can all but guarantee that we will not see those traditional “lazy, hazy days of summer” in global financial markets. It used to be that market players would head to the Hamptons, mountains or beaches on return after Labor Day, but this summer could provide a lot more action than anyone expects. That said, the Gorilla wishes each and all a restful and relaxing weekend. We will be back in action on Monday, so have a great weekend and remain ready for anything in the days and weeks ahead!
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