Strong Jobs Report Set Expectations of Pending Fed Rate Hikes

in Market Commentary by

Market Digest – Week Ending 3/6

A strong jobs report released Friday solidified expectations of pending Fed interest rate hikes, perhaps as soon as June. The prospect of rate increases drove stocks, bonds and gold lower and the dollar higher. Rate sensitive assets like Utilities and REITs saw bigger losses.

Weekly Returns:

S&P 500: 2,071 (-1.6%)
FTSE All-World ex-US: (-2.3%)
US 10 Year Treasury Yield: 2.24% (+0.24%)
Gold: $1,166 (-3.8%)
USD/EUR: $1.085 (-2.4%)

Major Events:

• Monday – The NASDAQ hit 5,000 for the first time since the dot-com era 15 years ago.

• Monday – Costco announced Citigroup and Visa will be its new credit card partners after ousting American Express last month. The transition will occur in 2016.

• Monday – Google announced plans to launch a wireless service, though the company said it is not intended to compete head on with the major carriers.

• Monday – Samsung unveiled its Galaxy S6, designed to take on the iPhone 6. It will be available for sale in April.

• Tuesday – Israeli Prime Minister Netanyahu addressed a joint session of Congress and said an emerging diplomatic deal with Iran would ensure they would gain nuclear weapons capability.

• Thursday – The Euro dropped below $1.10 for the first time since 2003 as the ECB affirmed bond purchases and said they would begin Monday.

• Friday – US employers added 295,000 jobs in February, more than expected. Unemployment fell to 5.5%. Wages rose just 2% from a year ago.

• Friday – Dow Jones announced Apple would replace AT&T in the Dow Jones Industrial Average Index.

Our take:

Once again, good economic news is being interpreted as a reason for the Fed to raise rates sooner, and is therefore interpreted as bad news for stocks. This is yet another reason not to get caught up in the daily, or even quarterly, noise of markets. A strong economy is good for markets, though at some point the economy will inevitably contract. That’s how it has always been, and there is no reason to think it will be different this time.

This week highlighted a potential cause for concern for those heavily over-weighted to value stocks. Within the industry it has become practically accepted as fact that value stocks are “better” than growth stocks. This, along with a recent love of high dividend stocks (which tend to be categorized as value) in a low interest rate world, may leave value more vulnerable to interest rate hikes.

There’s no way to predict markets with certainty, but whenever there is near universal agreement on something in the stock market, it should be a red flag. Year to date, value is lagging the S&P overall by about 1.5%. This isn’t a big spread, but is worth watching. We prefer a more even allocation to value and growth.

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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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