Market Recap – Positive US Jobs Report Drives Dollar Higher

in Market Commentary by

Market Digest – Week Ending 6/10

Stocks got off to a good start, extending their rally over the last few weeks in concert with oil prices. Further fears of supply disruptions allowed oil to close at over $50 per barrel for multiple straight sessions. However, these trends reversed on Thursday when the US jobs report came in better than expected, driving the dollar higher and equities lower. Investors sought safety in bonds and gold.

Weekly Returns:

S&P 500: 2,096 (-0.1%)
FTSE All-World ex-US: (-2.0%)
US 10 Year Treasury Yield: 1.64% (-0.06%)
Gold: $1,273 (+2.3%)
USD/EUR: $1.125 (-0.9%)

Major Events:

• Monday – Oil prices jumped as attacks and threats to the Nigerian oil industry stoked fears of longer term supply disruptions.
• Tuesday – Treasuries gained as the US sold $24 billion of three-year notes in the first of three auctions held over the week.
• Thursday – Weekly US jobless claims unexpectedly fell, driving the dollar higher.
• Friday – Gawker Media filed for bankruptcy after a $140 million judgement was ruled against it in its legal battle with Hulk Hogan.
• Friday – A funeral procession and public memorial was held in Louisville, Kentucky for boxing legend Muhammad Ali. He died the previous Friday at age 74.

Our take:

The US government held three Treasury auctions this week that were met with very strong demand, despite rates at or near historically low levels. Of course, part of this modest bond rally was driven by investors fleeing riskier assets in the latter part of the week. But with foreign rates hitting fresh lows, Treasuries are also looking more attractive as investors desperately search for yield.

This can be dangerous, particularly if it leads some to concentrate their portfolios in riskier areas, like junk bonds or high yield stocks. And we see this happening, particularly with those close to retirement as they try to build their portfolios around “yield”. Many still have it in their head that “living off the interest” is the best approach to generating income.

But one thing is clear: we no longer live in a time of easy 5% yields. Maybe those days will return, but as of right now you can’t achieve such rates without taking on some form of meaningful risk. So investors should be mindful of how they build their portfolios. We still believe a diversified, global multi-asset class approach is the best long-term solution. But even here it is important to temper expectations. Interest rates are at historical lows, and stock valuations are already above historical averages. So despite history telling us ~10% annual stock returns are normal, in reality such returns are unlikely over the next decade. So plan carefully.

It is a very interesting time indeed.

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Brendan Erne, CFA
Brendan Erne serves as the Portfolio Management Team Leader with Personal Capital Advisors. He has over 15 years of industry experience, spanning almost all levels of the investment process, including several years at Fisher Investments as an equity analyst covering the Technology and Telecommunications sectors. He also co-managed a large cap growth portfolio and co-authored Fisher Investments on Technology, published by John Wiley & Sons. Brendan is a CFA charterholder.

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