Market Digest – Week Ending 7/8
A stronger than expected jobs report propelled stocks to gains in the shortened holiday week. Non-farm payrolls rose by 287,000 in June, suggesting the weak May reading was an aberration and not a trend. The results were strong enough to provide confidence in the economy while soft enough to avoid significantly altering views on what the Fed may do with interest rates. Rates continued to fall in the aftermath of Brexit with the US Ten year Treasury finishing the week at 1.37% and the 30 year at 2.11%, lows for at least the last 60 years.
S&P 500: 2,129 (+1.3%)
FTSE All-World ex-US: (-0.8%)
US 10 Year Treasury Yield: 1.37% (-0.07%)
Gold: $1,365 (+1.8%)
USD/EUR: $1.105 (-0.7%)
•Tuesday – The British pound hit a 31 year low and fell below $1.30.
•Tuesday – The Bank of England reduced capital requirements for banks in an effort to mitigate a possible slowdown in the wake of the Brexit vote.
•Tuesday – M&G Investments became the third major institution to halt redemptions in UK based property funds, leading to some comparisons of liquidity halts in the subprime crisis.
•Wednesday – Japan’s 20 year bond went negative for the first time ever.
•Thursday – Danone agreed to buy WhiteWave, owner of the Horizon and Silk milk brands, for $10 billion.
•Thursday – Hostess Brands, maker of the Twinkie, filed for an IPO, just three years after being bought out of liquidation by private equity firms.
•Thursday – Five police officers were killed and seven wounded after a suspect opened fire at a rally protesting the police killings of two black men earlier in the week.
•Friday – The June jobs report was stronger than expected, prompting a rally in stocks which propelled the S&P 500 past its all-time closing high.
For capital markets, it is a strange new world.
Already disturbingly low interest rates around the globe fell further in the wake of Brexit. The moves have been significant. At a yield of just 2.1%, an investment in a 30 Year Treasury bond at the beginning of the year would now be up over 20%, dwarfing the very respectable 5% return for stocks. In Japan, 20 year rates went negative this week, meaning people are now paying the government to hold their money for the next 20 years despite Japan’s debt situation being much more severe than our own.
It is no wonder stocks and home prices are at or near record highs when the alternative is investing in bonds yielding almost nothing and money can be borrowed for less than 3%. The question is can it last? It is an incredibly complex situation and there is little or no relevant historical context. With extreme situations come the biggest opportunities and the biggest risks.
For most people, when it comes to their net worth, the chance of winning big isn’t worth the risk of losing big. So maybe more than ever, intelligent asset class diversification is critical. Bonds may be riskier than the usually are but still provide stability, especially when combined with stocks. Stocks are always volatile and valuations are high, but those who are scared of declines now face the risk that all of the money printing in the last decade will eventually ignite inflation which flows into stock and real asset prices. Missing out could greatly damage what matters – purchasing power and lifestyle. Owning a home could turn out to be a big blessing in the next decade and is a nice form of diversification, but we caution against too much leverage. Usually recession comes with falling interest rates, but with rates already at record lows there is the chance that the next recession has investors shunning bonds as well. Interesting times indeed.