3/10/17 – Stocks Down, Jobs, Fed & Debt Ceiling in the News

Stocks Break Winning Streak, Jobs, Fed & Debt Ceiling in the News

  • Stocks suffer their worst week of 2017
  • February jobs reports stronger than expected
  • The Fed meets next week, interest rate increase likely
  • Debt ceiling back in the news

Both indices endured their worst week of 2017. The Dow broke a 5-week winning streak, while the S&P 500 was down for the first time in seven weeks. On the week, the Dow and S&P 500 declined 0.5% and 0.4%, respectively.

The Bureau of Labor Statistics released a very strong February jobs report this morning. The economy added 235k net new jobs last month, well above the consensus estimate of 190k. This follows a strong ADP jobs report on Wednesday and suggests businesses are optimistic about the direction of the economy. Over 160 million Americans are working, the most in history. The unemployment rate declined to 4.7%. As I’ve mentioned many times over the last few years though, the unemployment overstates the strength of the labor market in my opinion. People who haven’t actively looked for a job in the prior four weeks are not included in the labor force. This excludes millions of Americans who are long-term unemployed and have given up looking for work. There are still over 94 million working age American not working. I think what we’re seeing is a nice sign of optimism from corporate America, but also a continuation of many of the same trends we’ve seen for years. Jobs are growing at a nice rate, but many people are still on the sidelines in need of a stronger labor market. Read More

The Federal Reserve Open Market Committee meets next week and it is widely expected they will decide to increase the Fed Funds rate by 0.25%, or 25 basis points. The strong jobs report today essentially finalized the decision and the market seems to be happy with it. In the 2012-2015 period, every time investors thought the Fed would raise rates, stocks would sell-off and vice versa. Today, most investors seem ready to welcome higher rates. I think this is because people recognize the economy is in a much better position today that it was a few years ago. My expectation for the year is we’ll see three, and potentially four rate increases. This could be a nice boost to savers as interest rates on savings accounts and fixed income investments increase. It could cause some volatility and unpredictability in the bond market in the short-term, but overall I believe this is a positive for investors. I know I would like to see higher returns in the fixed income portion of portfolios.

Eighteen months ago, Congress voted to suspend the debt ceiling. This happened a few times during the Obama years, where the ceiling was suspended instead of being raised. It’s sort of a semantic issue, since both options allow the government to continue borrowing money. The current suspension expires on March 16th so something needs to happen soon. I’ve argued over the years that the debt ceiling is pointless because we’ve raised it ~80 times over the years. Politically, it will entertaining to watch the situation evolve with one-party in control of Congress and the White House. Practically, we have to either suspend the debt ceiling again or raise it to some amount that will get us through another couple years. In spite of all the talk about fiscal discipline, the US has shown very little over the years, regardless of which party was in control. Read More

Oil was down sharply this week, decreasing 9.0% to close at $48.43/barrel. This is the first time since November that oil has finished a week below $50/barrel. The yield on the 10-yr Treasury increased, closing at 2.58%, from 2.49% a week ago. The average rate on a 30-yr mortgage reached a 2017 high of 4.21% from 4.10% last week.

Close Weekly YTD
Dow Jones 20,902.98 (0.5%) 5.8%
S&P 500 2,372.60 (0.4%) 6.0%
Oil 48.43 (9.0%) (10.1%)
10-yr Treasury (∆ in bps) 2.58 9 13

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