Interest Rates and the Economy
We mentioned last week how important it is for economic reports to come in strong over the next few weeks as higher rates have caused volatility in the market. There are two reports we are currently focused on. One is related to jobs and the other is on manufacturing. The U.S. economy added 379,000 jobs in February. That is the biggest gain in four months and is hoped to be a preview of a hiring surge in the months ahead. This is all depending on the economy fully reopening. This past weekend, the Senate passed a $1.9 trillion relief bill that is expected to be signed by President Biden by March 14th. With the stimulus bill passing through Congress, we could possibly see global GDP growth sitting around 7.5% in the next few quarters. We saw the talk regarding higher interest rates cause the market to trade back earlier in the week, but the positive jobs number helped the market have a great day on Friday of last week. Manufacturing activity grew last month at its fastest pace since the pandemic started. The Institute for Supply Management reported that manufacturing climbed to a three-year high of 60.8%, which was 2.1% higher than the January reading of 58.7%. Readings over 50% indicate growth while readings over 55% are considered exceptional. So, because of the number on the most recent report being over 60%, that is considered phenomenal growth. These economic reports will be important as ever in terms of showing how the economy is catching up with the markets and hopefully help drown out the noise around high interest rates.
What we have been watching over the last few months is the give and take between a stimulus-driven market and an economy-driven market. You can tell the difference because when it’s a stimulus-driven market, the market drops from good news. What we saw on Friday was great because we received good news on the jobs market and as a result, the stock market went up. Why would the stock market have gone down with good economic news? Technically, the stock market drops with good economic news because it reduces the chances of the stimulus. On Friday, we got both good economic news and good news about the stimulus. President Biden will likely sign the new stimulus bill by March 14th, which is the deadline for extending unemployment claims. The stimulus on unemployment claims will stop in March but for each individual household, if you make $75,000 or less as an individual or $150,000 or less as a household, you should receive around $1,400 in the coming weeks. Why is that important to the stock market? Those checks could be spent, which can drive earnings. In a recent survey by Deutsche Bank, many individuals between the ages of 25-35 are expected to put at least half of their stimulus checks directly into the stock market. That is a huge tailwind of demand for equities in the near term once these stimulus checks hit people’s bank accounts. We have seen savings rates spike over the last year due to people saving more during the Coronavirus crisis. We have also seen investment rates spike. We should see a boost from this in the short term to help get over the hump of higher interest rates.
The jobs report on Friday really outperformed expectations. One of the unique parts of it was that construction was actually down. Through this pandemic, we have seen construction jobs maintain high levels and increase as home improvements and new home construction have been high. It has been one of the few hot parts of the economy throughout the entire 2020 year. Seeing the construction numbers drop in what was an overall good jobs number report seemed concerning. However, the experts say that this is a temporary issue due to the state of Texas being locked down for a few weeks following the snowstorm. A lot of construction had been going on in Texas, but they were frozen out of the job market because of the weather. That temporary drop could mean that we will see a doubling up in the report numbers next month which again, is very positive.
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