New Records for Stocks Despite Recent Terror – Weekly Update for July 18, 2016

New Records for Stocks Despite Recent Terror

Stocks were up for the third week in a row, posting record highs on better-than-expected earnings results and solid domestic economic data. Since the bottom of the post-Brexit selloff, the S&P 500 has gained 8.06%. For the week, the S&P 500 gained 1.49%, the Dow grew 2.04%, the NASDAQ added 1.47%, and the MSCI EAFE grew 3.65%.

Despite the upbeat data, global violence has created some uncertainty for investors. On Thursday, a terrorist drove through hundreds of people in Nice, France, killing at least 84. A thwarted coup by Turkey’s military on Friday resulted in hundreds of deaths and could lead to political instability after the president rounded up thousands of suspected plotters. Just yesterday, three police officers were killed in Baton Rouge, Louisiana. Our thoughts and prayers are with the victims’ families in these tragedies.

One of the goals of terrorism is to cause financial damage as its effect on markets and economies are measurable; however, the human cost of violence is incalculable and its effects will be felt for many years to come. During these tough times, it is our responsibility to analyze the economic impact of terror so that we and our clients are informed to invest wisely.

The effect of terrorism on global financial markets is usually limited. Some estimates show that 9/11, the largest terrorist attack on U.S. soil, reduced U.S. economic growth by half a percentage point. However, the S&P 500 regained its lost ground within a month. When terrorists attacked the London tube in 2005, the UK market fell sharply. It recovered within days and the British economy actually rose 0.8% that quarter. Tourist locations often suffer more from terrorist attacks because they depend on visitors who may choose to visit destinations with safer recent histories.

With markets at record highs, it’s possible that we could see a pullback as investors sell first and ask questions later. However, the rally is broad-based and is built on solid fundamentals: June hiring data was strong, retail sales are sharply up, and early reads on corporate profits are favorable.

Our View

Our hearts go out to the victims of violence in Baton Rouge, Nice, and Istanbul. We don’t know whether markets will react negatively to renewed security fears, as history indicates that markets are resilient to violence. However, past performance is no guarantee for future results. Though we don’t believe that individual attacks are enough to push us into a correction, the headline risk from developing security situations is real.

As markets reached new highs last week, we should expect continued volatility in the weeks to come. While domestic data is positive, there are plenty of headwinds to give investors pause. Keeping an even keel during both the highs and lows is key to successful long-term investing. As always, we’ll keep you updated.

 

 

ECONOMIC CALENDAR:

Monday: Housing Market Index, Treasury International Capital

Tuesday: Housing Starts

Wednesday: EIA Petroleum Status Report

Thursday: Jobless Claims, Philadelphia Fed Business Outlook Survey, Existing Home Sales

Friday: PMI Manufacturing Index Flash

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HEADLINES:

Retail sales jump 0.6%. U.S. retail sales rose more than expected last month, supporting the view that the economy experienced solid growth last quarter.

Consumer sentiment falls in July. Americans held a more pessimistic view of the economy in July as they became concerned about future growth.

Business inventories rise slightly in May. Stockpiles held by U.S. businesses rose 0.2% in May as retailers restocked to meet buyer demand.

Beige book shows U.S. economic growth is moderate. A report issued by the Federal Reserve shows that the economy grew “moderately” in most districts though inflation remains muted.

S&P Hits New High on Jobs Surge – Weekly Update for July 11, 2016

Stocks surged after Friday’s better-than-expected June jobs report. The S&P 500 closed Friday less than a point from its record closing high of 2,130.82 reached in May 2015. Last spring was the only time the index had ever closed above 2,130… until now.

Today, the rally continued as the S&P 500 set a record intraday high of 2,143.13, topping its previous all-time high by nearly 10 points. Closing above its May 2015 record at 2,137.16, the S&P 500 confirms the second-longest bull market in its history. In addition, the NASDAQ crossed 5,000 for the first time in 2016. Despite global worries, we’re happy to see that investors are responding to success stories at home.

After April and May jobs reports introduced worries of a labor market slowdown, the June report showed that the economy added 287,000 new jobs last month. Since expectations called for around 165,000 jobs, investors counted the report as a solid win for the economy.

How many jobs does the economy need to support sustainable growth? According to a survey of Wall Street Journal economists, the break-even number for sustainable labor growth could be an average of 145,000 new jobs per month. Fewer new jobs, and the economy won’t be able to keep up with population changes as older workers retire and young adults join the workforce.

As with all things economic, there are other opinions. In 2013, the Federal Reserve Bank of Chicago estimated that the economy could get by with just 80,000 new jobs each month; Federal Reserve Chair Janet Yellen stated in December that under 100,000 new jobs per month are needed. You can see in the chart below that the labor market has produced above those estimates in most months since the beginning of 2014.

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Digging a little deeper into the June numbers gives us more positive news. The unemployment rate rose to 4.9%, which is actually a good thing because it rose as a result of more job seekers entering the labor pool. The Federal Reserve estimates that long-run unemployment in a healthy economy should average between 4.7% and 5.0%.

Even better, average hourly earnings rose 2.6% over June 2016, indicating that the labor market is tightening and employers are raising wages to compensate. Since economists had been worrying about the stagnant pace of wage growth, the June data is encouraging.

Our View

After June’s strong job report, it’s clear investors are feeling pretty good about the U.S. economy. The market has overcome many obstacles in 2016, and this record-breaking day for the S&P 500 reinforces our philosophy as long-term investors. While a healthy labor market supports continued economic growth and market upside, we expect additional volatility in the weeks to come. We still face a turbulent presidential election, corporate earnings season, Britain’s EU exit, and other market headwinds. Enjoy the rally and stay focused on your goals as we continue to pursue our goal of protecting and increasing your wealth.

 

ECONOMIC CALENDAR:

Tuesday: JOLTS

Wednesday: Import and Export Prices, EIA Petroleum Status Report, Beige Book, Treasury Budget

Thursday: Jobless Claims, PPI-FD

Friday: Consumer Price Index, Retail Sales, Empire State Manufacturing Survey, Industrial Production, Business Inventories, Consumer Sentiment

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HEADLINES:

Factory orders shrink. New orders for manufactured goods fell in May, but unfilled orders and falling business inventories hold promise for future demand.

China’s inflation drops. Last month, a measure of consumer inflation in China grew at its slowest pace since January on persistently weak demand. More government stimulus is likely to prop up the ailing economy.

Weekly jobless claims fall. The number of Americans claiming new unemployment benefits fell by 16,000 last week, adding more evidence that the labor market is on solid ground after May’s miss.

Service sector expands to seven-month high. An indicator measure service sector activity—a component of the economy that accounts for 80% of economic growth—rose in June, suggesting continued strength.

Stocks End Q2 With a Bang – Quarterly Update for July 5, 2016

Adobe Spark (21)After the previous week’s post-Brexit selloff, stocks closed out last week with one of the best performances of 2016 as investors bought the dip. In the first half of the year, the S&P 500 was up 2.69%, the Dow was up 2.90%, the NASDAQ was down 3.29%, and the MSCI EAFE was down 6.28%. All these numbers are as of the quarter’s end on June 30.

What lesson can we draw from recent market gyrations? Markets respond unpredictably to shocks, and periods of strong performance often follow close on the heels of frightening selloffs. While the media loves to predict gloom and doom at every opportunity, smart investors know to stay calm, look at underlying fundamentals, and stay away from emotional decisions. While we can hope for smooth sailing in the weeks ahead, we should expect continued volatility.

What’s going on with Britain’s exit from the EU?

Within Britain, a lot. In the aftermath of the vote, several major British politicians have resigned, including Prime Minister David Cameron, a key supporter of the “Remain” campaign. The leadership of major “pro-Leave” parties is also in flux, suggesting the coming elections will be eventful.

Several possible roadmaps for the Brexit have been released over the past week by various political factions, but no official plans exist yet. Differences in the way that UK and EU leaders would like to handle the Brexit have also emerged, leading to more uncertainty. We can expect these negotiations to dominate European headlines for months to come.

What does the data say about the U.S. economy?

The focus on international events has overshadowed some positive indicators here in the U.S. The final estimate of Q1 Gross Domestic Product (GDP) growth shows that the economy grew 1.1% in the first three months of the year. This final estimate is up considerably from the 0.5% growth originally reported in the first estimate.

Resilient domestic consumer spending supported growth last quarter and indications suggest the trend continued in the second quarter. Despite a strong U.S. dollar, exports grew more than expected, which is cheering news because it could mean that foreign demand is holding steady.

While we don’t yet have official data on Q2 GDP growth, two advanced forecasts by the Federal Reserve show 2.6% and 2.1% growth, respectively, indicating the economy accelerated after the first quarter.

Earnings reports will emerge in the next few weeks, and analysts are anticipating another tough season with total S&P 500 company earnings expected to be down 6.1% over Q2 2015. Much of the weakness can be attributed to persistent headwinds from low energy prices and a strong dollar. Despite the lackluster growth expectations, we’re hoping to see some positive surprises and standout performances. We’ll know more in a few weeks.

What will the next few weeks bring?

Volatility is likely. Though markets have shrugged off the Brexit panic, Europe isn’t in the rearview mirror yet, and we should be prepared for more hiccups down the road. While the summer is often a sleepy time for markets as traders take their own holidays, recent events make it likely that markets will remain fickle. When trading volume is low, even minor events can have an outsized effect on market performance.

Next week, investors will take stock of last quarter and wait for new data. Friday’s release of the June jobs report will be carefully analyzed to see whether May’s meager job gains were an anomaly or the beginning of a worrisome labor market trend. Minutes from the last Fed Open Market Committee meeting will hopefully provide some clarity about the Fed’s future interest rate decisions.

We’re still closely monitoring markets and reviewing economic data as it emerges. We’ll continue to update you as needed.

 

ECONOMIC CALENDAR:

 Monday: Markets closed for Independence Day Holiday

Tuesday: Factory Orders

Wednesday: International Trade, ISM Non-Manufacturing Index, FOMC Minutes

Thursday: ADP Employment Report, Jobless Claims, EIA Petroleum Status Report

Friday: Employment Situation

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HEADLINES:

Motor vehicle sales stay strong. Americans continued to buy cars and trucks in June despite the market volatility. Purchases of big-ticket items are a good sign for consumer spending last quarter.

Jobless claims increase. Weekly claims for new unemployment benefits rose by 10,000 last week. Though claims remain at historically low levels, the increase could indicate slowing growth in the labor market.

Construction spending falls. Spending on construction projects fell by 0.8% in May, dropping for the second-straight month. The fall was led by a significant cutback in spending on public construction projects.

Consumer confidence rises. A June reading of how Americans feel about the U.S. economy increased, indicating consumers aren’t letting economic uncertainty get to them.

Britain’s Messy Divorce: How Brexit May Affect U.S. Investors – Weekly Update for June 27, 2016

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Stocks fell sharply last week in response to Britain’s vote to leave the European Union (EU), putting major indices in the red for 2016. Why did markets react so badly?

The vote to leave was a surprise to most, and markets hate surprises. It’s too soon to know how Britain’s exit (Brexit) will play out, but predictions include a British recession, a breakup of the EU as other countries vote to leave, or the introduction of reforms by European leaders who see the writing on the wall. Since the referendum result isn’t binding on the government, there’s even a very small possibility that the Brexit won’t happen at all. It’s anyone’s guess at this point.

To help you understand how the Brexit may affect you as an investor, here are answers to some key questions:

How will Britain’s vote affect markets?

In the short and medium term, we’re likely to see a lot of volatility in financial markets around the world as investors grapple with the uncertainty of possible Brexit outcomes. In the long term, it’s hard to know what the final tally of the Brexit will be.

If we look at similar events such as the Fiscal Cliff standoff in 2011 and the European debt crisis in 2012, we see that though stocks fell significantly in the days and weeks that followed, prices later rebounded as the uncertainty cleared.

Is that what will happen this time? Possibly, but we can’t predict the future. While political events like this rarely have a long-term effect on markets, we should also keep in mind that 2016 has brought many geopolitical challenges to our door.

How will Britain’s vote affect the U.S. economy?

Currently, there’s no consensus from economists on what the fallout in the U.S. will be. Trade with Britain accounts for just 0.31% of U.S. Gross Domestic Product (GDP), so British problems with trade won’t necessarily affect us. However, the dollar is often viewed as a safe haven in times of international turmoil, which is pushing the dollar’s value up versus other currencies. A stronger dollar may weaken demand for U.S. exports, which isn’t good for our economy.

Globally, Britain accounts for 4.82% of worldwide GDP. We don’t yet know how negotiations over trade, labor, and finances will affect Britain’s economy. If Britain’s exit kicks off a mass exodus of EU member countries, we can certainly expect a greater impact on the global economy. However, it’s too soon to know if that will come to pass.

Britain’s vote will likely affect Federal Reserve policies this year. Post-Brexit, expectations of a rate increase this year have gone down tremendously. Some experts even suggest that rate cuts may be back on the table if economic growth slows.

Our View

Though we don’t think the Brexit is the end of the world, we want to acknowledge the risks it poses to markets. We believe that bull markets don’t die of old age, but we are facing growing headwinds from abroad that may threaten the bulls.

Unfortunately, we can’t predict the future. What we can do is focus on long-term financial goals and look for opportunities in the turmoil. The emotional reactions of others may create rational opportunities for us.

We are continually monitoring client portfolios and evaluating economic data and market research as it arrives. We will keep you informed and will contact you personally if we feel changes to your portfolio are necessary.

If you didn’t get a chance to listen to our immediate response to the Brexit vote, please take a few minutes to hear our Associate Investment Advisor, Josh Robb, discuss the vote’s impact on our investment strategy:

We are always ready and available to talk with you about the latest market updates. If you have any questions or concerns, please give us a call at 419-425-2400, or email us at hello@hzcapital.com. Thanks for reading, and remember, keep calm and invest on!

ECONOMIC CALENDAR:

Monday: International Trade in Goods, Dallas Fed Manufacturing Survey

Tuesday: GDP, S&P Case-Shiller HPI, Consumer Confidence

Wednesday: Personal Income and Outlays, Janet Yellen Speaks 9:30 AM ET, Pending Home Sales Index, EIA Petroleum Status Report

Thursday: Jobless Claims, Chicago PMI

Friday: Motor Vehicle Sales, PMI Manufacturing Index, ISM Manufacturing Index, Construction Spending

 

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HEADLINES:

Consumer sentiment slips in June. Americans were less optimistic about the economy and their financial prospects as concerns over slow economic growth grew. Despite the pessimism, consumers have been opening their wallets, pushing up measures of consumer spending.

Durable goods fall more than expected. May orders for long-lasting manufactured goods fell a surprising amount, suggesting that restrained business spending may drag on economic growth this quarter.

New home sales fall from eight-year high. May sales of new residential properties fell 6.0% due to weakness in several regions. However, new home sales are extremely volatile and overall housing trends are still strong.

Weekly jobless claims drop near 43-year low. Though hiring disappointed in May, weekly claims for new unemployment benefits dropped close to a multi-decade low, indicating that the labor market still has strength.

 

Video Update: The Brexit, Today’s Market Drop, and What You Should be Doing as an Investor

Shocking many, Britons voted to exit the European Union by a narrow margin on Thursday, ushering in a period of anxiety as experts think through the ramifications of this historic referendum. Around the world, traders reacted to the uncertainty as they typically do by selling first and thinking later.

It’s perfectly normal to worry during periods of market volatility, and we know you have questions about how the Brexit may affect your investments. In this video, our Associate Investment Advisor, Josh Robb, explains what this means for us in the United States, and what you should be doing as an investor.

If you have any questions or concerns, please give us a call at 419-425-2400, or email us at hello@hzcapital.com. We would love to chat with you.

Fed Blinks on Brexit Fears – Weekly Update for June 20, 2016

FED Blinks on Brexit Fears

Markets fell on Brexit fears and concerns about the Fed’s dovish statements, giving the Dow its worst week in a month. For the week, the S&P 500 slipped 1.19%, the Dow fell 1.06%, the NASDAQ dropped 1.92%, and the MSCI EAFE lost 2.78%.

The big news last week was the Federal Reserve’s decision not to raise interest rates. The decision wasn’t a surprise; just before the announcement, traders had assigned just a 1.9% chance of a June rate increase.

Looking at the official statement, we can see that the Fed is concerned enough about a slowdown in the labor market and persistently low economic growth to hold off on raising rates. However, the Fed hasn’t lowered its forecasts for economic growth or unemployment, indicating that its concerns may be short-term. Is that decision a reflection of the data or a political move designed to support its vision of a healthy economy? It’s hard to say.

A July rate increase is still possible though traders don’t seem to buy it. Current probabilities of a July rate hike sit at just 7.0%. What would need to happen for the Fed to move in July? Well, we’re not Fed economists, but experts think the Fed would want to see a strong June jobs report, a British vote to remain in the EU, solid data out of China, and stable financial markets.

It seems more likely that the Fed will push rate increases out to September or December despite Fed Chair Janet Yellen’s hawkish statements. With a contentious presidential election in November, it doesn’t seem likely that the Fed will rock the boat until the votes are tallied.

In a Q&A session, Yellen cited Britain’s upcoming referendum vote on EU membership as a factor in the decision to hold pat on interest rates. She believes that a Brexit is a decision that would have consequences for the U.S. financial and economic outlook.

After the shocking murder of a British member of Parliament, Brexit polls have swung closer to a “Remain” vote. However, the vote is still too close to call and politicking will continue until the votes are counted. Uncertainty around Britain’s possible exit will likely keep markets on edge, and investors should expect continued volatility as we approach the end of the quarter. We’ll keep you informed.

ECONOMIC CALENDAR:

Monday: International Trade in Goods, Dallas Fed Manufacturing Survey

Tuesday: GDP, S&P Case-Shiller HPI, Consumer Confidence

Wednesday: Personal Income and Outlays, Janet Yellen Speaks 9:30 AM ET, Pending Home Sales Index, EIA Petroleum Status Report

Thursday: Jobless Claims, Chicago PMI

Friday: Motor Vehicle Sales, PMI Manufacturing Index, ISM Manufacturing Index, Construction Spending

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HEADLINES:

Retail sales beat forecasts. Stronger-than-expected May retail sales numbers point to renewed demand for automobiles and other goods. Core retail sales, which correspond best with the economic component consumer spending, rose 0.4% after growing 1.0% in April.

Industrial production falls in May. Industrial output fell more than expected on declines in utilities and manufacturing output.

Business inventories increase slightly. Stockpiles for U.S. businesses edged upward in April, indicating that businesses expect higher demand this summer.

Housing starts fall. Groundbreaking on new houses fell in May as construction on multi-family units dropped. However, permits for future construction grew, indicating that the housing sector is still active.

Is Britain Really Going to Leave the EU? – Weekly Update for June 13, 2016

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Before we begin our usual weekly commentary, we wanted to take a moment to honor the victims of Sunday’s terrible attack in Orlando. Though details are still scarce, it is the most devastating mass shooting in U.S. history. Our thoughts are with the victims, their families, and with the community that now must cope with the aftermath of the tragedy. As we look for answers, let’s also remember to be grateful for the ones we love.

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Though stocks reached new 2016 highs last week, they ended the week mixed as investors showed nervousness ahead of Britain’s vote on exiting the European Union. For the week, the S&P 500 slipped 0.15%, the Dow gained 0.33%, the NASDAQ fell 0.97%, and the MSCI EAFE lost 1.79%.

Though fear took over last week, some strategists believe that the S&P 500 could still test new historic highs in the days ahead, indicating that there’s still some optimism on Wall Street.

What’s going on in Britain?

On June 23, Great Britain will hold a national referendum on whether or not to remain within the EU. The polls had shown that both sides were neck and neck, though the pro-“Brexit” (British exit) side has recently opened a 10-point lead. Though Britain retains the pound sterling and isn’t part of the monetary union, it is a member of the 28-member European Union, which gives it access to the EU’s tariff-free single market, accounting for 45% of Britain’s export trade. One estimate suggests that Britain’s trade with Europe is 55% higher than it would be had it not joined the EU.

Why would Britain want to leave such a lucrative arrangement?

The debate over whether to stay or go comes down to a few key issues:

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What would a Brexit mean for U.S. investors?
Markets would likely react badly if Britons voted to leave the EU. The situation would create serious uncertainty about the future of the EU, and markets hate uncertainty. We don’t know exactly how a Brexit would play out; many legal agreements would have to be renegotiated, work situations for EU and British citizens would be left in limbo, and the political climate would drastically change. However, these consequences would play out over several years as both sides negotiate the exit.

Estimates on the cost of a Brexit vary; one worst-case scenario projects a 6.2% loss of economic growth in Britain by 2030. Another estimate projects a best-case scenario of a 1.6% increase in Gross Domestic Product. It’s very difficult to predict the relative benefits and costs because so much depends on exit negotiations. However, since Britain and Europe need each other, it’s likely that post-Brexit negotiations would be favorable to free trade, making the worst-case scenario unlikely.

Many of the worst-case fears regarding a Brexit are similar to those we faced in 2015 with the “Grexit” or Greek exit. The departure of an important member nation could fracture the EU and cause other countries to consider following suit.

Though it seems unlikely that a Brexit would seriously harm U.S. interests, Federal Reserve Chair Janet Yellen stated that the Fed would consider the potential impact of a Brexit when setting interest rate policy this month. Most experts don’t expect the Fed to raise rates this week, though there’s always room for a surprise.

Our view

Is a Brexit the black swan event that could throw a wrench into markets? It’s certainly possible, but it’s not the most likely scenario. Though a British exit would certainly affect global markets, it’s important to keep things in perspective. Headwinds and threats come in all shapes and sizes, and it’s important to take them in stride. Some headwinds blow in for a while and then go away; others linger and cause more significant volatility. Being a long-term investor means staying flexible and maintaining focus on your individual goals. If you have any questions about how Britain’s vote may affect your portfolio, please give us a call.

 

ECONOMIC CALENDAR:

Tuesday: Retail Sales, Import and Export Prices, Business Inventories

Wednesday: PPI-FD, Empire State Manufacturing Survey, Industrial Production, EIA Petroleum Status Report, FOMC Meeting Announcement, FOMC Forecasts, Fed Chair Press Conference 2:30 PM ET, Treasury International Capital

Thursday: Consumer Price Index, Jobless Claims, Philadelphia Fed Business Outlook Survey, Housing Market Index

Friday: Housing Starts

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HEADLINES:

Consumer sentiment slips in June.
A measure of how Americans are feeling about the economy and their prospects fell slightly even though Americans are feeling the benefit of higher wages.

Jobless claims fall unexpectedly. The number of Americans filing new claims for unemployment benefits fell last week, suggesting strength in the labor market after May’s weak hiring.

Employers announce most job openings in nine months. Though employers are posting record job openings, they are holding back on filling them, suggesting businesses may have concerns about economic growth.

Oil prices jump on supply disruptions.  Though the world is still gripped in an oil-supply slump, supply disruptions in several oil-producing nations gave oil prices a recent boost.

 

Hixon Zuercher June 2016 Monthly Video Update

What does Cavalier mean? Check out our monthly update to see how Tony’s favorite basketball team can relate to the Fed’s interest rate discussion.

What Did the May Jobs Report Show Us? – Weekly Update for June 6, 2016

Adobe Spark (7)Stocks closed the holiday-shortened week mixed, with some sectors losing ground while others gained after a disappointing May jobs report signaled that the economy may not be strong enough for the Federal Reserve to raise rates this month. For the week, the S&P 500 ended flat, the Dow lost 0.37%, the NASDAQ increased 0.18%, and the MSCI EAFE added 0.13%.

On Friday, we got a look at how the labor market did in May. Analysts looked to the report to see whether the labor market would give the Fed the ammunition it needed to move at the June meeting. Here are a few things we took away:

Job growth disappoints…but it has happened before

The economy created just 38,000 new jobs last month, the worst showing since September 2010. The number of new jobs sharply missed expectations, which called for around 160,000 new jobs. However, seasonal factors, like a massive Verizon worker strike, which took 34,000 workers out of the count, were at play and may have affected hiring numbers.

The labor market has suffered temporary setbacks before. For example, in December 2013, the economy added a paltry 45,000 jobs; four months later, the economy gained 310,000 jobs. In March 2015, the labor market added just 84,000 jobs; in July, 277,000 new jobs were created.

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Labor market trends may slow job creation

The jobs report showed that the unemployment rate fell to 4.7%, the lowest since November 2007. However, much of the decrease occurred when jobseekers dropped out of the job search. As we approach full employment (some may argue that we’re already there), the effects of having fewer jobseekers begin to be felt by employers.

Employers who are hiring may struggle to find qualified candidates due to skill mismatches, a problem that’s likely to continue to affect certain industries.

These issues affect job creation in a “mature” labor market recovery. One industry expert projects that monthly job growth will average 175,000 for the rest of 2016. In comparison, monthly job increases averaged 251,000 in 2014 and 229,000 in 2015.

Can the slower pace of hiring support the consumer spending the economy needs to grow? Perhaps, if wages continue to grow. Wages were up 2.5% in May as compared to a year ago, which is a better pace of growth than we have seen. Another measure of wage growth favored by economists, the Employment Cost Index (ECI), shows that wages were up 2.4% (year-over-year) in the first quarter. A third measure calculated by the Atlanta Fed shows a rosier 3.4% annual increase in hourly wages in April. You can bet that the Fed will be looking at all three measures when deciding if wage growth is strong enough to support consumer spending this year.

The Fed may not raise rates in June

The weak report also may have reduced the odds of a June interest hike by the Federal Reserve, though some analysts think that other positive economic indicators might give the Fed the confidence to act. Right now, the market is pretty convinced the Fed won’t raise rates in June; one measure shows that the current market probability of a June hike is just 3.8%, while the probability of a July hike is 31.3%.

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Our view

Overall, does the weak May jobs report signal weakness in the U.S. economy?

Perhaps, though it’s far to soon to sound the alarm. Since other economic indicators like Gross Domestic Product growth, housing market activity, and personal spending all point to positive growth, it’s not likely that one weak report spells disaster for the economy. Rather than fixate on a single piece of data, it’s more important to look at overall economic trends.

Looking ahead, we’re expecting investors to take stock of the dismal jobs report and perhaps hit the brakes on the three-month rally we’ve experienced. Summer tends to be a slow season for markets as many traders take time off and stocks can overreact to headlines. A small pullback in the weeks to come wouldn’t surprise us, though traders could also shrug off the report. While weak data always sidelines some investors, long-term investors should focus more on their goals and less on short-term market swings. As always, we’ll keep you updated.

 

ECONOMIC CALENDAR:

Monday: Janet Yellen Speaks 12:30 PM ET, Janet Yellen Speaks 2:00 PM ET

Tuesday: Productivity and Costs

Wednesday: JOLTS, EIA Petroleum Status Report

Thursday: Jobless Claims

Friday: Consumer Sentiment, Treasury Budget

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HEADLINES:

Motor vehicle sales slump in May. The latest data shows that fewer selling days and lower foot traffic hurt U.S. auto sales last month.

Construction spending falls in April. Spending by construction firms on residential, government, and nonresidential projects declined, surprising economists who had expected a slight overall increase.

Factory orders beat expectations. April orders for U.S. manufactured goods grew by the largest amount in six months, though much of the growth came from volatile commercial aircraft orders.

Personal spending surges in April. Spending by American consumers grew more than expected while personal income increased in line with expectations, showing that consumer spending is off to a good start in the second quarter.

Dow, S&P 500 Post Best Week Since March – Weekly Update for May 31, 2016

Adobe Spark (13)

Stocks ended a solid week on a high note ahead of the Memorial Day weekend after statements by Federal Reserve officials boosted expectations of a rate hike this summer. For the week, the S&P 500 gained 2.28%, the Dow rose 2.13%, the NASDAQ increased 3.44%, and the MSCI EAFE added 2.11%.

Markets jumped on Fed statements last week after the previous week’s release of minutes from the April Fed meeting fanned expectations of an interest rate hike soon. On Friday, Fed Chair Janet Yellen stated support for an interest rate hike over the next few months, indicating that yes, the Fed is looking hard at a June or July rate increase if data holds. One measure of the probability of a rate hike at the June meeting rose to 34% after Yellen’s remarks, while bets on a July increase increased to 60%, more than double the probability estimate of a month ago.

Does the data support the Fed’s view of healthy economic growth? So far, it might. We got our second look at first-quarter economic growth Friday, and the latest official estimate shows that the economy grew 0.8% in the first three months of the year. Better-than-expected consumer spending led the increase, which is a good sign for the rest of the year. Fears about a recession seem to have largely faded as the latest data indicates more growth this year.

Two regional Fed banks raised their estimates of second-quarter growth last week as well, perhaps prepping markets for a rate increase soon. The New York Fed Nowcast Report increased its estimate of Q2 growth to 2.2% while the Atlanta Fed raised its GDPNow forecast to 2.9%. Why the difference in two reports issued by the Federal Reserve?

To come up with their “nowcasts,” Fed economists use existing economic data, extrapolate other data that hasn’t been released yet, and use statistical models to come up with a real-time forecast for GDP growth far ahead of the official releases by the Bureau of Economic Analysis.

Forecasting is challenging because of the amount of noise associated with major macroeconomic indicators; even official estimates of past GDP growth are revised multiple times as data is released. The gap between the two Fed GDP forecasts is the result of different computational methods used to arrive at a growth estimate. Is either estimate 100% reliable? Most likely not, which is why we like to look at a variety of forecasts and indicators when building investment models. Regardless of which forecast you might prefer, both are trending in the same general direction.

This week, investors will key in on several important economic data releases, including the May jobs report on Friday. The health of the labor market is expected to take a major role in Fed deliberations on interest rates at the upcoming June Market Committee meeting.

ECONOMIC CALENDAR:

Tuesday: Personal Income and Outlays, S&P Case-Shiller HPI, Chicago PMI, Consumer Confidence, Dallas Fed Manufacturing Survey

Wednesday: Motor Vehicle Sales, ADP Employment Report, PMI Manufacturing Index, ISM Manufacturing Index, Construction Spending, Beige Book

Thursday: Jobless Claims, EIA Petroleum Status Report

Friday: Employment Situation, International Trade, Factory Orders, ISM Non-Manufacturing Index

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HEADLINES:

Weekly jobless claims fall. The number of Americans filing new claims for unemployment benefits fell by 10,000, bringing claims back in line with long-term trends. However, some seasonal factors may have affected the data.

Durable goods orders increase. New orders for long-lasting manufactured goods like electronics, appliances, and vehicles increased in April. However, much of the growth came from orders for commercial aircraft—a notoriously volatile category—and may not be sustainable.

Consumer sentiment rises in May. A measure of American optimism about the economy increased to the highest levels in nearly a year as cheap gasoline, low interest rates, and an improving economic picture boosted sentiment.

Pending home sales increase to 10-year high. The number of homes under contract rose 5.1% over March levels, indicating the housing market is gaining steam.