Pages

Tuesday, 9 September 2014

Investment Implications of an Economy That, Yes, Is Still Improving

 

IMG_1234 newspapers

Overview

  • Last week ended on a sour note with a weaker-than-expected jobs number, but stocks reversed and rallied by the close on Friday.
  • Outside of the jobs report, other economic releases painted a consistently positive picture.
  • This, in turn, suggests short-term interest rates could rise, the dollar strengthen, and commodity prices fall.
Weak Jobs Report Ends the Week on Sour Note

Last week ended on a sour note with a weaker-than-expected jobs number, but stocks reversed and rallied by the close on Friday. Overall, however, stocks were essentially flat for the shortened week: The Dow Jones Industrial Average was up 0.23% to close the week at 17,137, the S&P 500 Index rose 0.20% to 2,007 and the Nasdaq Composite Index edged up 0.04% to 4,582. Meanwhile, the yield on the 10-year Treasury rose from 2.34% to 2.46%, as its price correspondingly fell.

It is important to note that a weak August payroll report is not indicative of a softening U.S. economy. In fact, while the U.S. economy still faces a number of structural issues, most cyclical factors suggest the economy should be relatively strong through the end of the year. This, in turn, suggests short-term interest rates could rise, the dollar strengthen and commodity prices fall.

But Other Releases Paint a Brighter Picture

In August, the U.S. economy created 142,000 net new jobs, well below what economists and analysts expected and the weakest number this year. However, we believe the modest report was mostly a reflection of seasonal weakness and is likely to be revised higher. Average monthly non-farm payroll gains are above the 200,000 level, consistent with a decent economic expansion, even as structural headwinds remain.

Indeed, outside of the jobs report, other economic releases painted a consistently positive picture. An important economic indicator, the Institute for Supply Management’s manufacturing survey, showed that new orders reached their highest level since 2004, while the service component of that survey hit a nine-year high. In addition, the auto sector, benefiting from continued low interest rates, witnessed a surge in sales to 17.45 million annualized, the best level since early 2006.

Reference: Russ Koesterich

No comments:

Post a Comment