|Dow||-69.93 to 16,493.37|
|S&P 500||-5.52 to 1,925.15|
|Nasdaq||-17.13 to 4,352.64|
|10-YR Yield||-0.051 to 2.505%|
|Gold||+$11.90 to $1,294.70|
|Crude Oil||-$0.55 to $97.62|
If there’s any doubt left that investors are obsessed about Federal Reserve policy, the stock market’s action today and yesterday should have eliminated it.
The Dow Jones Industrial Average plunged more than 300 points yesterday, its worst decline in several months. Then it lost as much as 125 more points today before crawling partially back. Not because the critical economic news on GDP, wages or job growth was bad. But because it was pretty good!
In today’s bizzarro market, that’s actually a negative for the asset markets. The reason? Strong data should lead to the Fed hiking interest rates sooner rather than later, and by a larger magnitude than Wall Street was expecting as recently as a few weeks ago!
It’s enough to make your head spin, I know. But try to follow me here.
This week we learned the following about the U.S. economy:
* Gross Domestic Product surged at a 4 percent annual rate in the second quarter. That was a big swing from the 2.1 percent decline seen just three months prior. Consumer spending, nonresidential fixed investment and other components were behind the strong growth.
* A key consumer confidence index surged to 90.9 in July from 85.2 a month earlier. That was far above expectations, and the best reading since 2007.
* Another gauge of manufacturing activity climbed to 57.1 in July from 55.3 in June. That was the strongest number going all the way back to April 2011.
* The economy created 209,000 jobs in July. That was down from an upwardly revised 298,000 in June, but it marked the sixth straight month of 200,000+ job creation. You know when the last time that happened was? 1997!
|Jobless filings are falling to the lowest level since 2006.|
* On top of that, the four-week moving average of jobless claims slumped to 297,250, the lowest since April 2006. And the employment cost index that measures wage pressures rose 0.7 percent in the second quarter, the biggest rise in six years!
So just to recap for those of you trying to keep track at home:
The economy just grew at a 4 percent rate.
Manufacturers are the busiest they’ve been since 2011.
Consumers are the most confident they’ve been since 2007.
Wages and benefits are growing at the fastest pace since 2008.
Jobless filings are falling to the lowest level since 2006.
And job creation is running at a pace we haven’t seen since 1997.
Does any of this suggest — in any way, shape or form — that we need zero percent interest rates? $25 billion a month in bond purchases still? Unprecedented support of the banking sector and artificial strategies to inflate asset markets by the Fed?
Of course not!! The Fed is so far off sides with reality that it’s not even funny! The catch? It’s offsides in the exact opposite direction from the mid-2000s!
“I’d rather have real, underlying, fundamental, healthy economic growth than artificial, Fed-fueled market madness.”
Back then, it was way too optimistic about the housing industry, the credit markets, and the economy. So it was far behind the curve in reacting by loosening policy. Now it has been way too pessimistic about the economic outlook when it comes to inflation and employment. So it’s far behind the curve in reacting by tightening policy!
And that, folks, is what explains the confusing, “bad” market reaction to “good” news in the real economy. Investors know the monetary heroin the Fed has been force-feeding the asset markets has to go away. They also know that it will lead to some intense symptoms of withdrawal, just like the first round of taper talk did in the summer of 2013.
But you know what? I’d much rather have real, underlying, fundamental, healthy economic growth than artificial, Fed-fueled asset market madness! So rather than freak out and sell this genuinely good news, I’m going to use the correction to get on board with promising stocks … in select sectors … experiencing their own private bull markets.
Meanwhile, what do you think about this market? Should Fed policy be such a huge focus for investors? Or does the real economy matter more? What do you think about the strong data on employment, GDP, and manufacturing? Does it have you feeling better about the U.S. backdrop, or does it seem like more government book-cooking? Let me know at the Money and Markets comments section here.
|OUR READERS SPEAK|
I hope you enjoyed the market insights and perspectives shared by my colleagues the last couple of days. It’s good to be back in the saddle again, and catching up on your comments.
Reader Tom weighed in on the merits of Russia as an investment destination, despite the increasing geopolitical risks. His view:
“Russia has vast resources. But Russia also has vast corruption and bureaucracy. On an economic level, I would not invest in Russia, no matter what the promising returns. With one stroke of the pen from Obama or Putin, one could lose everything. The risks are far too great to engage.”
Reader Barbara agreed when it comes to avoiding Russia, but for different reasons. Her comments: “Would I invest in any Russian investments? I’m a patriotic American. Umm … I don’t think so! I don’t care what they have to offer.”
As for the recent column about social media, Reader James weighed in, saying: “Do not use Twitter, never used Facebook. Most of the people I know do not use Twitter either, but their children do … I am 34 years old. Computer programmer/analyst.”
Thanks for the perspective, James. For my part, I don’t use Twitter either, but do use Facebook to keep in touch with family and friends. And I find that many kids and adults are interacting much more these days via sites like Instagram and Pinterest.
If you’d like to weigh in further, on these topics or any others, don’t hesitate to hop over to the comment section.
|OTHER DEVELOPMENTS OF THE DAY|
The ongoing improvement in the jobs market, not to mention the increase in inflationary pressures we’ve seen, continue to point toward tighter Fed policy. That’s what the Wall Street Journal‘s Fed writer Jon Hilsenrath concluded in his piece today.
The auto sector has been a key driver of the economic recovery, and July was no different. Ford sales rose 9.5 percent from a year ago, while GM sales climbed 9.4 percent. The full-year sales rate is on track to hit roughly 17 million, the all-time high set in 2000.
So much for that ceasefire in the Middle East. Israel and Hamas were right back at it, exchanging fire in Gaza, after the latest deal to hold off on attacks collapsed in just a few hours. More than 30 Palestinians and another two Israeli soldiers reportedly died, while one was captured.
The Ebola outbreak in Africa continues to garner more attention, especially now that an American aid worker is returning to the U.S. The patient will be quarantined for treatment in Atlanta, the first time someone infected with the deadly, contagious virus has been treated here.
Reminder: You can let me know what you think by putting your comments here.
Until next time,