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US Adds 175,000 Jobs; IMF Admits Mistakes

Market Digest – Week Ending 6/7

Friday’s Labor Department report showed the US added 175,000 jobs in May, exceeding most expectations and signaling the US economic recovery continues to advance, albeit slowly. It also increased expectations the Fed will begin tapering bond purchases sooner than later, creating selling pressure for most interest rate sensitive assets. Bond prices declined. The S&P 500 posted a modest gain for the week as market participants balanced good economic news with potential of reduced stimulus.

Weekly Returns:

S&P 500: 1,643 (+0.8%)

MSCI ACWI ex-US: (+0.2%)

US 10 Year Treasury Yield: 2.17% (+0.04%)

Gold: $1,381 (-0.4%)

USD/EUR: $1.322 (+1.8%)

Major Events:

  • Monday – Federal Reserve Bank of Atlanta President Dennis Lockhart said central bank officials are committed to record stimulus measures.
  • Tuesday – IBM bought SoftLayer Technologies in a deal thought to be worth around $2 billion.
  • Tuesday – Salesforce acquired ExactTarget for $2.5 billion.
  • Wednesday –The International Monetary Fund admitted missteps in its handling of the bailout of Greece, suggesting austerity measures harmed the economy more than anticipated.
  • Friday – The Labor Department reported that US payrolls added 175,000 jobs in May, more than expected. The official unemployment rate ticked up from 7.5% to 7.6% as more workers entered the job market.

Our Take: 

Both in media and anecdotally, we notice a lot of people who envision the following scenario: the economy continues to grow, the Fed reduces stimulus, disaster ensues and the market falls.

The Fed has enormous power. We don’t dispute this in any way. But if the economy surprises to the upside, we consider it a good thing. In fact, to the extent the economy can do well and add jobs with less creative forms of credit or liquidity, even better.

When the Fed starts to take away the punch bowl, it may cause a short term correction as people re-evaluate. But if the economy is doing well it means companies should be making a lot of money. In the long term, this makes them more valuable. Keep in mind the Fed isn’t talking about selling a bunch of bonds. They are simply suggesting a reduction in the amount they purchase, or a move back toward normal conditions.

As long term investors, we will be perfectly happy to see the economy growing and the Fed reducing its presence regardless of short term market moves. Good CEOs think this way too. That’s why we continue to see M&A deals (two decent sized ones this week) and buybacks like Walmart’s $15 billion announcement this week.

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