We prefaced this last week, but the most important data point each month is the jobs data point. The reason for that is because that’s the information that the Federal Reserve is looking at to decide whether or not they should reduce, increase, or continue their bond purchases. The Fed has said that they’re looking for the economy to go back to full employment. We took a very big step forward on Friday with the July non-farm payrolls number showing that 943,000 jobs were added in the month of July. We saw stocks that usually benefit from a strong economy, benefit on Friday. We saw individual areas that benefit from a weak US economy, go down on Friday. This proves that the jobs data is connected to the stock market. It’s also connected to the bond market because if you have less stimulus from the Fed, it’s likely that we will see higher interest rates. Interestingly enough, we also saw a stronger dollar. Usually, higher inflation and higher economic growth mean a weaker dollar. This indication of a stronger dollar is likely due to this not being a one country economy and market. Looking at the US, everything is strong, but if you compare us to the world and how we’re all connected, we actually received some bad data out of global areas. We saw China’s imports and exports decrease along with a drop in US car demand. This isn’t because people aren’t wanting to buy cars, but because we can’t produce them due to the supply chains being impacted. Vietnam and Thailand really fell off a cliff in their production largely due to an increase in variants, potentially from COVID. We’re seeing wages go up in the US but across the world, we’re seeing things kind of slow down. We saw West Texas Intermediate crude oil prices drop to $68 a barrel. This came at a time when summer driving season has never been hotter. It’s all very connected to the US economy, US interest rates, and the US dollar. We got some really good data on Friday of last week but there’s clearly still some caution globally.
Rates and Risk
What is going on with rates and where’s the best place to get any yield without taking too much risk? Yields ended last week at 1.3% so today, we wanted to go over a few reasons why rates are staying lower when there are reasons for them to be higher. First, the Federal Reserve is still purchasing $80 billion a month in Treasuries. More inflows are keeping rates lower. Second, there is a remaining $16.6 trillion in negative yielding sovereign debt globally, again keeping US rates lower. Third, the federal budget is poised to climb which limits new supply bumps. Fourth, persistent strength in stocks is leading to portfolio rebalancing. More money flowing into bond funds means, again, lower rates. The fifth and final reason is that investors are actually hedging against possible geopolitical risk or a policy error like raising taxes. This means more money is going into treasuries for safety. While lower rates are great for individuals looking for mortgages or refinancing a home, it has been tough for income investors. It’s causing us to be more strategic with our income producing investments. We could see rates go higher as the Fed starts to taper their purchasing of bonds, possibly at the end of this year. Yields matter because it impacts investment strategy and certain sectors, more than others. This is something we’re continuing to watch carefully.
Last week was a steady week for the market with the S&P 500 closing Friday at a price of 4,429. That gives us a resistance level of 4,460 and a new support level of 4,400. We are seeing some economic strength from a domestic standpoint. There’s evidence of that with the 100-day moving average which is currently sitting at a price of 4,206. We’re starting to see some of the fundamentals correlate with the technicals. That’s going to be important as we look forward, from an international standpoint, to see what the markets are going to do. This has been a very strong summer for the markets as we have seen a lot of strength and other industries are starting to pick up.
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
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