Markets Rally on Weak Jobs Data; Bonds Up

The Dow (+1.6%), NASDAQ (+3.2), and S&P 500 (+2.6%) finished last week on a strong note, but the indices finished the month of August down about 3% - 5%.  Meanwhile, taxable bonds and tax-free municipal bonds were up about 0.4%, but also slid about 1% - 2% the prior month.  The 10-year Treasury yield fell 0.04% to end the week at 4.17%.  Thank goodness August is over, but we shouldn’t feel like we’re out of the woods, because September has historically been the worst month of the year for the stock markets.

Corporate earnings season has effectively concluded, but there was still plenty of relevant economic news reported last week.  Most notably, the labor market is showing more signs of weakness, as the number of job openings has dropped significantly.  The August labor report was also weaker, as the number of jobs in June and July were revised lower and the unemployment rate rose from 3.5% to 3.8%.  These reports were met favorably by the markets, as they gained momentum in hopes that the Fed won’t raise interest rates at its next meeting later this month.  That said, the Fed also relies heavily on their favorite inflation measure, Personal Consumption Expenditures (PCE), and the August PCE showed signs that inflation remains sticky, something the Fed would like to see come down a bit.

In the chart below, you can develop several conclusions.  For starters, you can see that the consumer received far more money than they were spending in 2020 and into early 2021.  However, starting in early 2021, the consumer was spending more than they were receiving.  This has also led to historically low savings rates and historically high credit card debt we are currently seeing, with delinquencies rising to pre-COVID levels.  Because the consumer represents 68% of the US economy, it can be very important to follow their behavior.  The massive consumer spending that began in early 2021 led to the highest inflation rates we have seen in over 40 years.  If consumer spending slows, as many economists predict and we are beginning to see, this could lead to a recessionary environment and help lower inflation.  Don’t believe for a moment that the Fed isn’t striving for this, but it wouldn’t be good public relations to come out and say that in their speeches.

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