Markets React Favorably to Disappointing Jobs Report

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Market Digest – Week Ending 1/10

Markets struggled to find direction in the first full week of 2014, but most asset classes ended the week with gains. The S&P 500 rose 0.6%, while international stocks and ten year Treasuries each gained about 1%. A softer than expected jobs report eased concern the Fed will accelerate the pace of stimulus cuts, providing a boost to interest rate sensitive assets.

Weekly Returns:

S&P 500: 1,842 (+0.6%)
FTSE All-World ex-US: (+1.0%)
US 10 Year Treasury Yield: 2.86% (-0.13%)
Gold: $1,248 (+0.9%)
USD/EUR: $1.367 (+0.6%)

Major Events:   

  • Monday – The Senate approved Janet Yellen as new Chairwoman of the Fed.
  • Monday – Research firm Gartner said it expects global technology spending to rise 3.1% in 2014.
  • Tuesday – The Eurozone reported inflation at 0.8%, the lowest on record, prompting speculation the ECB will further ease monetary policy in the coming months.
  • Thursday – JP Morgan will pay $2.6 billion to settle charges levied by the federal government for turning a blind eye to the Madoff scandal.
  • Friday – US job growth slowed in December, amid cold weather, suggesting the Fed may act more slowly in reducing stimulus. US payrolls rose by 74,000, less than expected, and unemployment fell to 6.7%, in part driven by people leaving the workforce. Interest rates fell.
  • Friday – Iran and Western powers neared an interim accord calling for a six-month relaxation of tensions, intended to provide more time for a longer-term deal to restrict Iran’s nuclear program.

Our Take:

It’s fun to be invested when bad economic news causes rising prices, which is what happened with Friday’s “disappointing” jobs report. Slower job growth could mean slower reduction of Fed bond buying, which could mean lower interest rates, which should help assets like REITs and gold.

That’s a lot of ‘coulds’ and ‘shoulds’. But this week’s market action was a strong reminder that interest rates are not pre-destined to rise and bonds are not pre-destined to lose value.

Emerging markets stocks have become highly correlated with bonds. The thinking is that emerging markets are reliant on cheap money to fund their growth and benefit when US interest rates drop. We’re not so sure that is the right way to look at it, but it is driving prices in the short term.

When it comes to investing, it is important to look at changing asset prices relative to expectations. The good news is expectations are for interest rates to rise. If they don’t, owners of bonds will do pretty well in the next few quarters. Emerging markets would also benefit, but developments in China are probably more important. The bad news is expectations for US economic growth are now fairly lofty, just the opposite of the last few years. So while weaker than expected growth can drive short term gains, like Friday’s jobs report, persistent negative surprises are more likely to weigh on markets over time.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk is a member of the Personal Capital Advisors Investment Committee. He also serves as Vice President of Portfolio Management. Prior to Personal Capital Advisors, he was an integral leader within the portfolio management team at Fisher Investments. During Craig’s time there, the company increased assets under management from $1.5 billion under management to over $40 billion. His responsibilities included risk management, portfolio implementation oversight, and management of all securities and capital markets research analysts. Mr. Birk graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

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