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Market Recap – Growth vs. Rate Hike Tug-O-War

Market Digest – Week Ending 5/8

A strong jobs report Friday allayed concerns about the US economy slowing and brought stocks back into positive territory for the week. Employers added 223,000 jobs in April, bringing the unemployment rate down to 5.4%. In the UK, the Conservative Party had an election victory, giving Prime Minister David Cameron a majority in Parliament.

Weekly Returns:
S&P 500: 2,116 (+0.4%)
FTSE All-World ex-US: (+0.3%)
US 10 Year Treasury Yield: 2.15% (+0.04%)
Gold: $1,187 (+0.8%)
USD/EUR: $1.12 (+2.9%)

Major Events:
• Monday – Cisco announced Chuck Robbins will succeed John Chambers as CEO.
• Tuesday – Disney announced stronger than expected earnings, driven in part by continued success merchandising last year’s hit, Frozen.
• Thursday – Fitbit filed for an IPO.
• Thursday – Yelp was rumored to be evaluating a sale of the business as it struggles to meet user and revenue growth expectations.
• Thursday – The Conservative Party was deemed the winner of UK elections, gaining a majority in Parliament and bringing into question issues of Scottish independence and a break from the EU.
• Friday – The US economy added more jobs than expected in April. Official unemployment dropped to 5.4%.
• Friday – The Justice Department opened a probe into how the Baltimore police department stops, searches and arrests people.

Our take:

The market is stuck in a tug-o-war between desires for strong growth and fear of the Fed raising interest rates. Friday’s jobs report satisfied both – a “Goldilocks” scenario that drove stocks and bonds higher. While this provided a fuzzy feeling heading into the weekend, eventually one side will have to give.

The best scenario for stocks is if the economy grows a consistent, moderately strong rate which allows the Fed to raise rates slowly and in a measured way. There’s no reason to think that can’t happen, but economies are impossible to predict.

In San Francisco, it feels like things may be overheating. But with national hourly earnings up just 2.2% from a year ago, we’re reminded that doesn’t necessarily represent the bigger picture. So after last week’s disappointing Q1 GDP number, the strong jobs report was welcome news.

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