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Market Recap – Weak Jobs Report Could Deter The Fed Raising Interest Rates

Market Digest – Week Ending 6/3

An extremely weak jobs report on Friday surprised markets. US Stocks fell modestly for the day, finishing the week flat. The dollar fell, driving currency adjusted gains in international stocks and bonds. US bonds also gained as expectations for a June rate hike dimmed considerably. Gold rose. In other news, the ECB maintained its existing stimulus program with no new measures and an OPEC meeting ended without adding production cuts.

Weekly Returns:

S&P 500: 2,099 (+0.0%)
FTSE All-World ex-US: (+0.7%)
US 10 Year Treasury Yield: 1.70% (-0.15%)
Gold: $1,244 (+2.8%)
USD/EUR: $1.136 (+2.3%)

Major Events:

• Tuesday – The Case/Shiller national home price index rose 5.2% in March from a year ago and is now within 4% of the all-time high set in 2006.
• Tuesday – Consumer spending rose 1% in April from the previous month, which was more than expected. Personal income rose 0.4%, suggesting inflation may follow.
• Tuesday – Missouri-based Great Plains Energy acquired Kansas’ Westar Energy fro roughly $8.6 billion. Missouri-based Great Plains Energy Inc. on Tuesday said it agreed to buy Kansas’ Westar Energy Inc. for roughly $8.6 billion
• Wednesday – Australia’s GDP grew 3.1% in the first quarter, the highest in 3 years.
• Wednesday – Brazil’s Q1 GDP shrank 0.3% in Q1, the fifth consecutive decline.
• Thursday – OPEC ended a meeting in Vienna without adding production caps.
• Friday – US non-farm payrolls increased by 38,000 in May, significantly below expectations. The official unemployment rate fell to 4.7% as many people dropped out of the labor force and are no longer seeking employment.

Our take:

For the last five+ years, the question we’ve been asked more than any other is what will happen when interest rates rise. But for ten years, they have continued to decline instead. The 30 Year Treasury yield is at 2.52%, which for all practical purposes is equal to all-time lows. This week’s somber jobs report means that most likely the Fed will not raise rates at its June meeting, though there is still a reasonable chance it will happen in July. The dollar fell, emerging markets assets and gold rose, and bonds fell.

For long term investors, we really can’t imagine why it matters which month the Fed raises rates, or even why a 0.25% interest rate difference is particularly relevant. US stocks are richly valued. Higher rates would make it easier to switch out of stocks and into bonds. International stocks and currencies appear more fairly valued or in many cases undervalued. The short term reaction of a US rate hike will be to gravitate toward the higher yield and the “safer” currency. But if one were to think about even the next few years, instead of trying to time the next few months, the larger fundamentals suggest return expectations for US stocks and bonds should be modest. Those with globally diversified portfolios should feel better about upside potential and a smoother ride.

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