The markets were mixed last week, as the Dow (-0.1%), NASDAQ (+2.2%), and S&P 500 (+0.4%) were mostly positive. Meanwhile, taxable bonds dropped about 0.5% - 1% and tax-free municipal bonds were roughly flat. The drop in bonds came mostly on Friday as Treasuries lost value as their corresponding interest rates rose. The 10-year Treasury is back up to 2.84%, but far lower than the nearly 3.5% it reached in June.
Last Friday, the July jobs report was much stronger than expected, showing a gain of 538,000 last month. That report caused Treasuries (and bonds) to lose value. Here’s why. The Fed has two mandates - maintain price control (i.e. – inflation) and keep a healthy job market. Given that the job market remains very strong, it reduces pressure against the Fed for continuing to raise interest rates to combat inflation. Further, wage growth was strong, and that puts additional pressure on inflation. Conversely, two important measures of economic growth were released last week, and in addition to those measures being strong, they both reported that their prices paid showed a significant decline. Thus, a mixed bag of news regarding inflation, but the big numbers are being released this week, with the Consumer Price Index (CPI) and Producer Price Index (PPI) for July. With gas prices showing a steady decline over the month of July, it will be curious to see the impact on these key measures of inflation.
Corporate earnings season is nearing its end, as 87% of S&P 500 companies have reported their Q2 earnings. Thus far, earnings growth is at 6.7%, far greater than the 4.0% expected, which has helped stocks rebound. However, there is also a trend of companies lowering their future earnings expectations, which should be a little concerning. At least we didn’t get crushed by Q2 earnings, which has been welcoming.
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About the Author: Michael Menninger, CFP®️