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    Markets "In a Nutshell" for August 7, 2018

    Aug 07, 2018

    Investment Week at a Glance

    Stocks finished mostly higher for the week. The Dow Jones Industrial Average was up 0.05%, the S&P 500 rose 0.76%, the New York Stock Exchange Composite (2,000 stocks) was up 0.25% and the average investors index (Value Line Index) was up 0.59%. Foreign stocks (DJ Global ex U.S.) were down 1.43%. Bond prices were higher for the week, pushing the yield on the 10-year U.S. Treasury down 1 basis point to finish the week at 2.95%. (Data sources: Barron’s Financial, Wall Street Journal)

     

    Unemployment Rate Ticks Lower

    The BLS reported that 157,000 jobs were created in the month of July while the unemployment rate fell to 3.9% from the June number of 4.0%. The jobs report came in below the forecast, partly due to the bankruptcy of Toys “R” Us (accounting for approximately 32,000 jobs lost). There were upward revisions, however, for May and June of an additional 59,000 jobs. Through the first 7 months of 2018, the economy averaged 215,000 jobs created per month, well ahead of the 184,000 jobs created for that same period in 2017. 

     

    In other good economic news, hourly earnings rose 2.7% from the prior year.  Unemployment for Americans who do not possess a high school diploma (approximately 7.2% of the domestic workforce) was reduced to 5.1%, which is its lowest level since this data has been tracked.  Adults with jobs rose to 60.5%, its highest since 2009. The U-6 rate, which includes workers not actively looking for employment and part time workers preferring a full time job, fell to its lowest level since 2001 at 7.5%.  

     

    Federal Reserve Policy Watch

    At its August 1st meeting, the Federal Reserve made no changes to its policy but made it clear they will continue to normalize interest rates. In addition, the Fed made it clear that its mandate of 2% inflation and full employment has now been achieved (although the inflation rate over the last 12 months is 1.9%, just short of its 2% goal). Markets continue to price in quarterly rate hikes through the middle of 2019, where the Fed should reach its long term range of 2.75%-3.00%.

     

    Since December of 2015, the Federal Reserve initiated seven 25 basis point hikes, which has resulted in a flattening of the yield curve. This flattening occurs when the spread between yields on long term debt and short term debt narrow. This is considered normal in the late stages of economic expansion, which we are currently in. The yield curve can become inverted, however, when short term rates exceed long term rates, which has historically been an indication of an impending recession.  Stay tuned.  

     

    Quiz:

    What is the preferred inflation gauge of the Federal Reserve?

    a)      Personal Consumption Expenditures Price Index (PCE)

    b)      Consumer Price Index (CPI)

     

    Have a good week!

     

     

     

     

     

    Answer to quiz:

    a)      Personal Consumption Expenditures Price Index (PCE)