The shortened week of July 4th was one in which markets were dominated by volatility. Interest rates and the dollar rose, causing stock prices to fall. The job data was the culprit.
The media blamed higher interest rates for the pullback, as Fed chiefs bombarded the channels with warnings that the pause was over and that financial markets should expect higher interest rates.
The point became clear as the latest data on job growth pointed to further strength. On Thursday, payroll company ADP reported that 497,000 new jobs were added in June; most for over a year. There are currently more than 50 percent more vacancies than unemployed.
The latest reading from the Supply Chain Management Services Index also rose to 53.9 in June, ahead of the expected reading of 51.2. This prompted the Atlanta Fed to raise its GDP expectations for the second quarter to 2.1 percent from 1.9 percent.
Even though the manufacturing side of the economy appears to be slowing down, the services side of the business book appears to be boosting economic growth. This could lead to even stronger job growth as the service sector continues to hire workers to meet sustained demand.
On Friday, however, nonfarm payrolls data for June came in far lower than expected. It totaled 209,000 job gains versus an expected 240,000 and the unemployment rate was unchanged at 3.6 percent, but the average hourly wage rose 0.4 percent versus a 0.3 percent rise
None of this will make the Fed happy. The difference between the two work reports was contradictory at best. It wasn’t the wage increases. This likely means that inflation and the Fed will keep interest rates high for longer. There are even rumors that instead of just one or two rate hikes, we may be in for a few more in the coming months.
The debt market reacted by selling US Treasuries in anticipation of this possibility, causing the US 10-year Treasury bond to climb above 4 percent for the first time in months. Mortgage interest rates also reached their highest level of the year at 6.71 percent for a 30-year fixed-rate mortgage. This has weighed on real estate activity this summer as homeowners pulled back from bidding and price-sensitive buyers scaled back their buying plans.
There is no question that inventories will be expanded. This week blew some of the air out of the uptrend that’s propelled stocks higher year-to-date. Even the most overbought stocks, like the Magnificent Seven, were not immune to the sell-off. I suspect we are in for a period of consolidation that will somewhat delay my expectations for further market gains.
The summer months are more volatile on average as fewer players are on their computers. Holidays and shorter work weeks leave markets vulnerable to major ups and downs. I plan to be on vacation myself the week of July 17th, so unfortunately there are no columns this week.
Many strategists are expecting a temporary peak in the markets this month. I agree. I’m hoping the stocks can move a little higher and will continue to do so, but we’re overwhelmed at this point. Corporate profits are just around the corner. Valuations are stretched and many companies need excellent results to support prices.
Inflation data in the form of consumer price index and product price index are also expected next week. That should give stocks a chance to rally higher when the numbers are cooler. Higher results would give traders an excuse to sell. The bottom line, however, is that I believe the markets will continue to rise over the coming months, so stay invested.
Bill Schmick is registered as an investment advisor representative of Onota Partners Inc. in the Berkshires. He can be reached at 413-347-2401 or email him at [email protected].
Comments are closed.