July 6, 2018

Stocks opened higher this morning as the jobs report and trade tariffs dueled for traders’ attention. The Dow is currently up 120 pts and the SPX is up .8%. Indeed, this is a traders’ market with low volume, lots of back-and-forth, but no real trend. At the moment, all eleven market sectors are in the green, led by healthcare (+1.3%). Biotechs are rallying on the back of a positive clinical trial for Biogen’s new Alzheimer drug. European markets are poised to close slightly higher on the session and Asian markets were (surprise, surprise) higher overnight. The VIX Index is back town to 13.6 and VIX July futures are trading down around 14.8. Oil is rising again; WTI crude is up around $73.60/barrel. The Bloomberg Commodity Index is up .3% today but still down on the year. Copper continues to struggle on fears that the emerging trade war could dent China’s economy. Bonds are trading higher in price—lower in yield—despite a positive jobs report. The 5-year and 10-year Treasury yields are hovering around 2.73% and 2.83%, respectively. So as an investor, you get only 10 more basis points in yield for locking up your money over an additional 5 years. The yield curve continues to flatten, and the Federal Reserve is increasingly squeezed between that fact and the fact of strong economic growth. Bloomberg Economics now believes the flat yield curve will convince the Fed to pause rate hikes. 

Today’s Employment Situation Report was broadly positive. The economy generated a better than expected 213,000 net new jobs in June, and the prior month tally was revised a bit higher as well. The unemployment rate rose to 4.0% and the under-employment rate rose to 8.0%, but that’s because more people re-entered the work force. The labor force participation rate climbed to 62.9%. Most of the new jobs were generated in healthcare, education and business services. In addition, manufacturing showed a strong increase in hiring activity. Wage growth held steady at 2.7% y/y growth, whereas economists expected an acceleration to 2.8%. So inflation remains in check. This one data point—along with the yield curve mentioned above—may be enough to get the Fed to consider pausing rate hikes. The most important takeaway from this report, however, is that global trade tensions didn’t show up. Wall Street economists and strategists are straining hard to find any signs that threatened tariffs are beginning to negatively impact businesses. This report gives them no ammunition. 

We’re seeing glaring signs of a disconnect between investor confidence and current economic data. According to The American Assn. of Individual Investors (AAII), only about 28% of retail investors are believe the stock market will rise over the next six months, whereas 39% believe stocks will fall. And yet, this week we saw incredibly positive jobs as well as ISM business activity reports. And it is true that something has to give. Either President Trump or the Chinese have to concede something on trade, or the Fed has to pause rate hikes, or we have to get some confirmation that economic growth and corporate earnings will continue to be strong in the second half of the year. 

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