Investors Rejoice an Increase in the Unemployment Rate and Await Earnings Releases
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 07/06/18. Rates and Economic Calendar Data from Bloomberg as of 07/09/18. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Global equity markets came roaring back after, what felt like, months of sideways returns and they did so in the face of lingering trade tensions and on the back of an increase in the unemployment rate. Before we dive into the counter-intuitive rational behind a higher unemployment rate signifying good news, an update on global markets. The S&P 500 Index rallied to a level of 2,760, representing an increase of 1.56%, while the Russell Mid-cap Index gained 1.76%. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, exhibited some of the most impressive performance returning 3.12% for the week. On the international equities front, developed markets pushed 0.57% higher last week while emerging markets continued to give up ground losing 0.71%. Finally, the 10 year U.S. Treasury yield declined modestly and settled at 2.82%, while the U.S. Dollar followed suit falling 0.53%.
Over the past week capital markets were graced with a positive catalyst in the form of a monthly unemployment reading. The jobs figure showed that the unemployment rate increased from 3.8%, which was the lowest level seen in 18 years, to 4.0%. For a majority of investors this figure, at a glance, would appear to represent a negative reading, but markets felt otherwise and embraced the underlying factors that pushed the rate higher. Namely, the labor force participation rate.
Throughout much of this recovery pundits have argued that a steadily declining unemployment rate was slightly misleading as it relates to the health of the economy and labor force, because it was, in part, boosted by a labor force participation rate that was also on a downward trajectory. In other words, yes, the economy was producing more jobs, but it was doing so for a dwindling set of workers. Technically the unemployment rate decreases if laborers exit the job market entirely (i.e. early retirement due to a lack of opportunity) and the number of jobs produced remains constant. Fortunately, the recent tick up in the unemployment rate was caused by a surge in the number of unemployed individuals actively seeking work from a level of 6.065 million in May to 6.564 million in June, coupled with a stronger-than-expected new jobs report.
Although the employment situation continues to echo strength in the underlying economy (as does the expected strength of 2nd quarter corporate earnings reports), downside risks and economic uncertainties still remain. With that said, portfolio diversification becomes increasingly important during times of heightened uncertainty, and we encourage investors to revisit the diversification that may, or may not, be in place within their existing portfolios. If you would like to learn more about how we are helping clients invest dynamically and consistently with their own goals, timeframe and tolerance for risk, please do not hesitate to speak with your Hennion & Walsh Financial Advisor.
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
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